The decision of Alan Greenspan and colleagues was widely expected

The increase was widely expected and in a statement following its two-day meeting, the Fed said the decision of its rate-setters had been unanimous.

It added that it may continue to raise rates at a "measured pace" into 2005.

With the US economy now growing strongly, the Fed wants this growth to continue without seeing prices rise.

Balancing act

Economists estimate that the Fed will continue to raise rates by a quarter of a percentage point following each near-monthly meeting until they reach somewhere between 3% and 4.5%.

They [the Fed members] are basically laying the groundwork for another rate hike in March and there was no surprise in today's hike or language Economist Elizabeth Denison

They see this as the neutral level or balance that will neither hinder economic growth or fuel inflation.

"Output appears to be growing at a moderate pace, despite the rise in energy prices and labour market conditions continue to improve gradually," the Fed said.

Financial markets greeted the widely expected decision with a shrug, with stocks, treasury bonds and the dollar all largely unchanged.

'Groundwork'

Chris Low, chief economist at FTN Financial in New York, said the Fed's explanation was "essentially a reprint of the December statement".

"They [the Fed members] continue to hint that there will be another quarter point [rise] at the next meeting, that they will continue to remove accommodation at a measured pace. But that was also expected."

Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein, agreed that the latest Fed decision was a virtual rerun of December.

"They are basically laying the groundwork for another rate hike in March and there was no surprise in today's hike or language," she said.

"Plus, both the risk to growth and inflation remain balanced."