The federal funds target rate, which banks charge each other for overnight loans, climbed to 1.5%.

In a statement published on Tuesday, the Federal Open Market Committee (FOMC) explained the move: "In recent months, output growth has moderated and the pace of improvement in labour market conditions has slowed."

"This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward."

It was the second rate rise since 30 June, when Federal Reserve chairman Alan Greenspan and his colleagues edged up the key rate from a 1958 low of 1.0% in a pre-emptive anti-inflation strike.

Expectations

The step was widely expected, because a failure to carry on a promised programme of gradual increases in rates could have spread fears about the true state of the economy.

"This softness likely owes importantly to
the substantial rise in energy prices"

Federal Open Market Committee statement

Even after the increase, policymakers said interest rates were low enough to act as a stimulant for the economy, particularly when combined with solid productivity gains.

As the Federal Reserve policymakers met, New York's main crude oil contract shot above $45 for the first time on record, propelled by unrest in Iraq and a crisis at Russian oil titan Yukos.

Record oil prices

New York's benchmark contract, light sweet crude for delivery in September, leaped 20 cents to hit a high of $45.04 a barrel.

"Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors," the FOMC statement said in an allusion to energy prices.

The risks for both prices and sustainable economic growth appeared to be neutral for the next few quarters, it said.

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

The FOMC also raised the discount rate, which the central bank charges commercial banks, by a quarter point to 2.5%.