Fed nudges interest rates; more hikes expected

WASHINGTON - The Federal Reserve on Tuesday raised interest rates for the fifth time since June and signaled it was likely to keep pushing them higher at a "measured" pace in the new year.

The latest quarter-point increase raised the federal funds rate, the interest that banks charge each other, to 2.25 percent, more than double the 46-year low of 1 percent in effect when the Fed kicked off its credit-tightening campaign six months ago.

The increases have been designed to back off slowly from the exceptionally low interest rates the central bank had put in place over the previous three years as it battled a bursting stock market bubble, a recession and the Sept. 11 terrorist attacks.

Responding to the latest increase, commercial banks quickly moved to boost their prime lending rate, the benchmark for millions of consumer loans and business loans, by a quarter-point to 5.25 percent.

The Fed's action - and comments - bolstered confidence on Wall Street and pushed stock prices higher. The Standard & Poor's 500 and the technology heavy Nasdaq index both closed at their highest levels since before the 2001 terrorist attacks. The Dow Jones industrial average was up as well, rising 38.13 points to finish the day at 10,676.45, the Dow's best close since last March.

Economists give Federal Reserve Chairman Alan Greenspan and his colleagues high marks for navigating the tricky transition away from an extremely easy money policy that had been in effect for an extended period without causing the financial upheavals that have happened in the past.

Greenspan joked recently that "rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged his position by now obviously is desirous of losing money."

In its latest action, the Fed repeated its pledge that with inflation pressures remaining low, the central bank should be able to keep raising rates at a "measured" pace.

That could translate into further quarter-point rate hikes through the first half of next year until the central bank decides it has reached a "neutral" level for monetary policy in which rates are neither stimulating economic growth nor acting as a drag on growth.

Many analysts believe that point is probably around 3.5 percent.

Some believe the quarter-point rate increases will keep coming until the fifth meeting of 2005 next August.

However, others said the Fed may be getting closer to a pause in which policy-makers will assess the impact the rate hikes so far are having before deciding to go further.

"I think the Fed is quite happy with current economic circumstances," said economist David Jones, author of four books on the Greenspan Fed.