CONSUMERS TO PAY MORE FOR CREDIT.

Byline: Bruce Meyerson Associated Press 

The Federal Reserve raised interest rates Tuesday by a quarter percentage point for the second time in two months in a bid to slow the economy and contain inflation.

Here are some questions and answers about the Fed's action and the effect it might have on the economy and consumers:

Q What did the Fed do?

A The policy-making arm of the nation's central bank, led by Fed Chairman Alan Greenspan, raised the suggested rate that banks charge each other for overnight loans from 5 percent to 5.25 percent.

Fed officials also raised the discount rate it would charge on direct loans to banks from 4.5 percent to 4.75 percent, the first increase in that rate since Feb. 1, 1995.

The boost in rates, which was widely expected, came after a quarter percentage point increase in the Fed funds rate on June 30.

Q How much and how soon will higher interest rates affect consumers?

A The impact of Fed rate hikes is usually immediate, but not drastic since they come in small quarter-point increments.

Banks, paying more to borrow from the Fed and other banks, will quickly make up for their increased expenses by charging businesses and consumers more to borrow.

The interest rates on many types of consumer borrowing - including variable-rate mortgages, auto loans and credit card debt - are tied to the prime rate or directly to the federal funds rate.

The prime rate was raised to 8.25 percent from 8 percent, effective Wednesday, by several large banks. The prime is the base upon which banks compute loans to business customers. The best customers may pay less than the prime rate. Riskier ventures will pay a higher rate.

Savers may benefit from higher rates because banks and other financial institutions will pay more interest on deposits in various types of accounts.

Q Why the sudden push to raise interest rates?

A The two rate increases, the first in more than two years, are designed to ripple through the economy and slow the pace of borrowing and spending among banks, businesses and consumers.

While everyone likes a strong economy, there is a potential downside. If consumer confidence is too high, it may become hard for factories and service providers to keep up with demand. And if jobs are plentiful, workers bargain for better wages. Companies faced by product shortages or lost sales may boost prices so they can hire more workers and pay higher wages.

Q What's next?

A In announcing Tuesday's action, the Fed maintained a neutral stance on future interest rate decisions, expressing confidence in the economic outlook.

In a joint written statement, the Fed board said that its actions on Tuesday and June 30 should ``markedly diminish the risk of rising inflation going forward.