Fed Raises Rates by 1/4 Point to 3.25%

As expected, the Federal Reserve Thursday raised its bellwether federal funds rate target by a quarter-percentage-point to 3.25 percent from 3 percent, its ninth increase in a row, and gave no sign that the year-long campaign of increases was nearing an end.

The decision by Fed Chairman Alan Greenspan (search) and the Federal Open Market Committee (search) is part of a credit-tightening campaign to bring rates back up to more normal levels.

When the Fed started boosting rates one year ago, the funds rate stood at 1 percent, the lowest level in 46 years.

As they had in the statement after their May 3 meeting, policy-makers said they expected to keep removing stimulus at a "measured" pace -- wording taken to mean a continued course of smaller, quarter-point increases rather than bigger ones.

Despite some recent signs of economic softness, partly induced by lofty energy prices, the Fed's desire to curb inflation looked likely to keep official rates on an upward trajectory for now.

"Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually," the Fed said in outlining its rate decision, which also raised the more symbolic discount rate a matching quarter-point to 4.25 percent.

The Fed is expected to pause in its rate-rise campaign eventually but has been vague about timing. The halt is likely to come when rates hit a level the Fed deems "neutral," one that neither slows growth nor stimulates inflation.

Economists say a neutral fed funds rate lies somewhere between 3 percent and 5 percent but policy-makers have been loath to pin that down.

"The market was looking for any sign that this process is winding down and this statement doesn't give any sense the Fed is done," said Bill Strazzullo, the chief market strategist for State Street Global Markets in Boston. "It would appear we're going to get at least several more quarter-point increases."

Much of the Fed's language echoed the May 3 statement.

"With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," it repeated.

The central bank said the risk of weaker growth was roughly equivalent to the risk of higher prices.

The U.S. economy has grown steadily since a brief recession in 2001 but persistently high energy costs pose a threat. The government reported Wednesday that the overall economy grew at a healthy rate of 3.8 percent in the first three months of this year and many analysts believe growth in the current quarter will be only slighlty slower than that pace.

Meanwhile oil hit a record $60.95 a barrel on Monday though it had dipped back to around $57 on Thursday.

The federal funds rate (search) — the overnight rate at which banks lend to other banks — is supposed to influence borrowing costs throughout the economy.

But this relationship has come unstuck in the current cycle with long-term bond yields, which move in the opposite direction from prices, now lower than when the Fed began raising the benchmark rate.

The increase in the funds rate was expected to trigger a corresponding quarter-point increase in banks' prime lending rate, the benchmark for millions of business and consumer loans.

The Fed is also still wrestling with the "conundrum" of long-term rates, which have stayed low despite increases in short-term rates over the past year.

That has kept many borrowing costs, such as mortgage rates, surprisingly low and helped drive up housing prices in many parts of the country to levels some fear represent dangerous asset bubbles but that Fed Chairman Alan Greenspan believes are merely "froth."

Reuters and the Associated Press contributed to this report.