WASHINGTON -- The Federal Reserve lifted interest rates to the highest level in 4 1/2 years yesterday but indicated its 18-month rate-raising campaign was winding down.
Chairman Alan Greenspan and colleagues voted unanimously to boost the federal funds rate, the interest banks charge each other on overnight loans, by one-quarter point to 4.25 percent -- the 13th consecutive increase of that size since June 2004. That's when the Fed policy-makers 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.
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 4 1/2 years.
The policymakers eliminated a description they had used each time they raised rates. Economists saw that as a sign from the Fed that its rate hikes were ending.
On Wall Street, stocks got a lift from that, with the Dow Jones Industrials closing up 55.95 points.
''The underlying message here is that the Fed is rounding for third and heading for home plate. But they are not finished playing yet," said Stuart Hoffman, chief economist at PNC Financial Services Group.