US Fed raises key interest rate by 0.25 point to 2.25%

US Federal Reserve decided Tuesday to raise the federal funds rate, which commercial banks charge each other on overnight loans, by one-quarter percentage point to 2.25 percent from 2 percent.

The decision was made by the central bank's policy-making body, the Federal Open Market Committee(FOMC), at its final regular meeting this year. This was the fifth consecutive rate increase since June 2004, when the key short-term interest rate stood at a 46-year low of one percent.

The federal funds rate is the Fed's main tool for influencing economic activity. As a result of Tuesday's action, commercial banks were expected to increase their prime lending rate to 5.25 percent from 5 percent.

The prime lending rate, the benchmark for many short-term consumer and business loans, moves in lockstep with the federal funds rate.

"The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity," the FOMC said in a statement after the meeting.

Output appears to be growing at a moderate pace despite the earlier rise in energy prices, and labor market conditions continue to improve gradually. Inflation and longer-term inflation expectations remain well contained, said the statement.

It said "the Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal."

"With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

Nonetheless, "the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability," it said.

In a related action, the Board of Governors approved a quarter percentage point increase in the discount rate to 3.25 percent, according to the statement.

In June this year, the Fed ordered its first rate increase in four years, raising the federal funds rate to 1.25 percent from one percent. Since then, it has boosted rates five times with each move by a one-quarter point.

The FOMC is scheduled to meet eight times in 2005. The first one is Feb.1-2.