FED RAISES RATES; HIKE IS 2ND THIS SUMMER.

Byline: Martin Crutsinger Associated Press

The Federal Reserve raised borrowing costs for millions of Americans for the second time this summer, boosting two rates on Tuesday by a quarter point in an effort to keep the economy from overheating.

The increase triggered a quick quarter-point increase to 8.25 percent by commercial banks in their prime lending rate, the benchmark rate for millions of consumer and business loans, ranging from home equity loans to some credit card debt.

In a joint printed statement, the Fed board said its actions ``should markedly diminish the risk of rising inflation going forward.'' Some in the financial markets hoped that was the Fed's way of saying it will stop with just the two rate increases.

But many private economists said they still expect a third tightening move later this year because the economy may keep growing more rapidly than the Fed considers safe.

Wall Street, riding a roller-coaster after the Fed announcement, closed with the Dow Jones industrial average down just 16.46 points from Monday's record high.

But economists suggested investors were being overly optimistic.

``The market euphoria is not justified,'' said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. ``This is not the end of the Fed rate hikes.''

While Sohn said the central bank could move to increase rates for a third time at its next meeting, which will be held Oct. 5, other analysts suggested the Fed will take a wait-and-see stance, watching to see whether the economy slows on its own.

The Fed left its policy directive in neutral, but analysts said this meant little. The central bank also moved to neutral after its meeting June 30, which did not stop it from raising rates Tuesday.

``The market has misjudged the Fed's determination to fight inflation,'' said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.

In its announcement, the central bank board said it was increasing its target for the federal funds rate, the interest that banks charge each other on overnight loans, by a quarter point to 5.25 percent. The rate had been boosted from 4.75 percent to 5 percent on June 30 in the first increase in two years.

The Fed's goal is to raise rates that it directly controls and influence rates set by financial markets, such as 30-year mortgage rates, and thus slow economic activity in such interest-sensitive sectors of the economy as auto sales and home sales.

The central bank board also announced it was raising its largely symbolic discount rate, the interest it charges on direct loans to banks, by a quarter point to 4.75 percent.

Some economists saw the double move as an effort by Federal Reserve Chairman Alan Greenspan to underscore his resolve to fight inflation. He promised Congress in July that the Fed would move promptly and forcefully to keep prices stable.