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Fed gives interest rate a nudge up

The quarter-point rise is the 13th in 18 months, but the end of such increases may be in sight.

WASHINGTON - The Federal Reserve lifted interest rates to the highest level in 41/2 years Tuesday but indicated its 18-month rate-raising campaign was winding down. At least one more increase in borrowing costs seemed in store to keep inflation under control.

Chairman Alan Greenspan and his Fed colleagues voted unanimously to boost the federal funds rate, the interest banks charge each other on overnight loans, by one-quarter percentage point to 4.25 percent.

It was the 13th consecutive increase of that size since June 2004. That's when Fed policymakers embarked on a credit tightening campaign to lift the funds rate - which had been sliced to a 46-year low of 1 percent when the economy was faltering - to more normal levels.

Fed policymakers had mostly positive things to say Tuesday about the economy, especially its ability to grow solidly despite the Gulf Coast hurricanes.

In response to the rate increase, commercial banks began increasing their prime lending rate - for certain credit cards, home equity lines of credit and other loans - to 7.25 percent, also the highest in 41/2 years.

For investors and economists, the Fed's words spoke louder than its rate action, which was expected.

The Fed policymakers, in a statement issued after their closed-door meeting, eliminated a description they had used each time they raised rates over the past year and a half - that even with the increases rates were quite low.

Economists viewed that deletion as a sign from the Fed that its rate-raising campaign was drawing to a close.

On Wall Street, stocks got a lift from that, with the Dow Jones Industrials closing up 55.95 points.

Still, the Fed signaled there is more work to be done before it declares that the economy and inflation are on an even keel.

The statement said, "Some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

Importantly, the Fed opted to keep the word "measured" to describe future rate increases. Economists have taken that to mean quarter-point rate hikes.

"The underlying message here is that the Fed is rounding for third and heading for home plate. But they are not finished playing," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Most economists expect another quarter-point increase at the Fed's next meeting Jan. 31. That will mark the last meeting for Greenspan, who will retire after more than 18 years at the helm.

Many economists also expect another quarter-point increase to follow on March 28, which would be Ben Bernanke's first meeting as Fed chief. That would leave the funds rate at 4.75 percent, where the Fed would move to the sidelines.

Others, however, predict another increase will come at the May 10 meeting, leaving the funds rate at 5 percent. A few think the Fed won't stop until the funds rate is boosted to 5.50 percent in August.

The ultimate course of interest rates will be shaped by what economic barometers going forward say about the economy's standing and the nation's inflation climate.

The economic picture looks pretty good, Fed policymakers said.

"Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid," they said. And "core" inflation, which excludes energy and food prices, "has stayed relatively low," they observed.

Yet there are inflation risks, they said.

In another important change to the policy statement, Fed members cited "possible increases in resource utilization" which economists said was code for a strengthening job market as having "the potential to add to inflation pressures." Policymakers also dropped a reference contained in many past Fed statements about healthy productivity gains. Productivity gains help to blunt inflation.

Altogether, those changes "indicate a higher level of concern with respect to future inflation," said Mark Zandi, chief economist at Moody's Economy.com.

Economists said that was another signal a few more rate increases probably will be in the offing. But Zandi said, "They are close to the end of nearly two years of rising interest rates."

The Fed's action comes against a recent string of largely good economic news.

The economy grew at an energetic 4.3 percent pace in the third quarter despite the ill effects of the hurricanes. Economists expect solid growth in the October-to-December period. A 0.3 percent increase in sales at the nation's retailers in November, released Tuesday, suggested shoppers are spending modestly.

Employment, meanwhile, rebounded in November after a two-month lull, with payrolls expanding by 215,000.

[Last modified December 14, 2005, 00:14:15]