Dennis Cook/AP Fed Chairman Alan Greenspan raised new worries about inflation in a speech last month.

The action is in line with what most market observers had expected. Many economists believe Wednesday's rate hike is the first of several the Fed will make this year in an attempt to slow an economy that shows few signs of slowing on its own.

The announcement came after a closed-door meeting of the Federal Reserve Open Market Committee, the officials who set interest rate policies.

The Fed said it was increasing its target for the federal funds rate — the interest that banks charge each other on overnight loan — to 5.75 percent from 5.50 percent.

It also raised its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks by a quarter point to 5.25 percent from 5 percent.

In a statement explaining its decision, the Fed said it continued to be worried that the rapidly growing economy "could foster inflationary imbalances that would undermine the economy's record economic expansion."

In Wednesday's announcement, the Fed for the first time employed a new disclosure policy that it hopes will remove some of the confusion that had arisen in financial markets over the past year over its announcements concerning potential future actions.

The new simplified announcement said the Fed believes that future "risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

This statement does not guarantee that there will be future rate increases but it puts financial markets on notice that the Fed continues to be worried about inflation dangers.

Many economists believe Wednesday's rate increase will be followed by two or more increases before the end of June.

The economy grew at a sizzling 5.8 percent annual rate in the last three months of the year and by 4 percent for all of 1999. That growth has pushed down the nation's unemployment rate to 4.1 percent, the lowest level in 30 years. Many analysts believe a further dip to 4 percent will be reflected in January's employment report Friday.

With the economy growing so fast, employers are having trouble finding scarce workers to fill job openings. Thus, they are wooing them with higher wages and benefits, increasing the costs of doing business to the point that economists and members of the Fed fear a sharp run-up in prices.

Consumer prices have remained in check but wages and benefits, as measured by the Labor Department's closely watched employment cost index, surged in the fourth quarter, touching off fear about inflation and causing the stock market to plunge when the report was released last week.

— The Associated Press contributed to this report