Fed raises interest rate to 2.5 percent

By The Associated Press

WASHINGTON -- The Federal Reserve on Wednesday raised interest rates for the sixth time since last June as policy-makers continued their efforts to make sure a strengthening economy does not trigger unwanted inflation.

The Fed announced that it was raising its target for the federal funds rate, the interest that banks charge each other, by a quarter-point to 2.5 percent. Before the Fed began tightening credit last June, the funds rate had been at a 46-year low of 1 percent.

The February increase is not expected to be the last. Analysts think the Fed will push the funds rate up in quarter-point increments through most of this year.

That would mean higher borrowing costs for consumers and businesses. The Fed's action on Wednesday was quickly followed by an announcement from Wells Fargo Bank that it was boosting its prime lending rate by a quarter point to 5.50 percent. Other banks were expected to follow suit.

In explaining its action, the Fed repeated a previous promise that it would raise rates at a "pace that is likely to be measured."

Analysts believe the Fed will keep raising rates in small quarter-point steps as long as there are no signs that inflation is becoming a problem.

Wall Street took the widely anticipated Fed action in stride. The Dow Jones industrial average, which had been up for the day, remained in positive territory after the mid-afternoon Fed announcement.

"What this says in a nutshell is that the economy is right where the Fed wants it to be," said David Jones, head of DMJ Advisors. "Inflation is contained and the Fed is happy about that."

Consumer prices rose by 3.3 percent last year, compared to a 1.9 percent rise in 2003. It was the biggest annual increase since 2000, but it was driven by a surge in energy prices. Inflation pressures are expected to moderate this year, helped by an expected continued decline in global oil prices.

The Fed's goal is to move the funds rate from an accommodative stance, where it is still stimulating extra economic growth, to a neutral stance where the funds rate is neither stimulating growth nor holding the economy back.

"The Fed is taking its foot off the accelerator without hitting the brakes," said Richard DeKaser, chairman of an American Bankers Association panel of economists that meets twice a year with Fed policy-makers to give them their views of where the economy is headed.