By Jeff McKinney
Enquirer staff writer

The Federal Reserve, discounting recent signs of economic weakness, pushed ahead Tuesday with its campaign to keep inflation under control by boosting a key interest rate a quarter-point.

Wall Street, encouraged by the Fed's optimistic assessment of economic prospects, pushed stocks higher.

Declaring that the economy "appears poised to resume a stronger pace of expansion," Federal Reserve Chairman Alan Greenspan and his colleagues announced they were increasing the target for the federal funds rate from 1.25 percent to 1.50 percent - the second such increase since June.

Commercial banks, including those in Greater Cincinnati, immediately followed that move by announcing they were raising their prime rates, the benchmark for millions of business and consumer loans, from 4.25 percent to 4.5 percent. The prime rate normally moves in lockstep with Fed rate increases.

The Fed also raised the discount rate, what it charges banks on direct loans, to 2.50 percent from 2.25 percent.

The boost is not good news for consumers and businesses because it raises borrowing costs on financial instruments they use to buy everything from appliances to computers to cars to homes.

"Today's interest-rate hike will sustain the trend of rising rates on credit cards, home equity lines of credit, and personal loans," said Greg McBride, a senior financial analyst at Bankrate.com. "Small businesses will also face higher borrowing costs."

He said the Fed stuck to the mantra of measured economic softness to rising energy prices and expressing confidence that the economy will keep growing stronger.

Mortgage rates have actually fallen significantly since the last rate hike (of a quarter point) last month.

McBride attributed that to the economy stumbling.

Indeed, the average rate on a 30-year, fixed-rate $100,000 mortgage with no points fell to 5.97 percent locally Tuesday, according to a weekly survey of lenders by the Cincinnati Area Board of Realtors.

And there could be some more rate increases on the way.

Jim Russell, director of core equity strategy at Fifth Third Asset Management in Cincinnati, said he believes that the Fed will raise interest rates a quarter-point at least at two of its next three meetings between now and the end of the year.

His reason: Recent economic data - jobs growth, consumer spending and retail sales - has turned soft unexpectedly and it's unclear when economic strength will return.

Russell pointed to the weak July jobs data, which showed the nation only gained 32,000 jobs when the expectation was in the range of 240,000. The July numbers also followed weaker-than expected job growth in May and June.

Investor confidence was bolstered by the Fed's assurances that the recent slowdown should be temporary, and stocks moved sharply higher. The Dow Jones industrial average finished the day up 130.01 points at 9,944.67.

Some of Greater Cincinnati's largest banks - including Fifth Third, National City, U.S. Bank, PNC Bank and Key Bank - Tuesday raised their prime rate to 4.50 percent. Those rates are charged to banks' most creditworthy customers. The prime rate is the key benchmark for millions of loans, from home equity and credit card balances to short-term loans for small businesses.

The Fed's action also will mean higher yieldsfor savers with money market accounts and CD accounts. But it could take some time - and several rate increases by the Fed - before those gains are noticeable.

"However, yields will still endure a long road back as interest rates will not rebound from 40-year lows overnight," McBride said.

The Associated Press contributed. E-mail jmckinney@enquirer.com