The Federal Reserve yesterday raised US interest rates by a quarter point to 2.5 per cent and signalled no change in its outlook.

The policymaking Federal Open Market Committee left its accompanying statement virtually unchanged from its December meeting.

It said that, even after yesterday's rate increase, "the stance of monetary policy remains accommodative" and repeated that it expects to continue raising rates "at a pace that is likely to be measured".

Yesterday's decision was widely expected and there was little financial market reaction.

Mr Alan Greenspan, Fed chairman, will give his twice-yearly testimony before Congress on behalf of the FOMC on February 16th-17th in which he will update the committee's views.

The central bank has made it very clear that it expects to continue raising rates to a more neutral level. Investors are pricing in a 3.5 per cent federal funds rate at the end of the year.

Federal Reserve policy-makers are increasingly confident that the US economy has entered a self-sustaining phase of above-trend growth. In spite of some upside risks, inflation pressures are seen as well contained.

The economy grew by 4.4 per cent last year although growth in the fourth quarter was slower than expected, at a 3.1 per cent rate on the government's advance estimate. But this reflected the drag of the trade deficit: net exports subtracted 1.7 percentage points from the growth rate at the end of the year.

Risks associated with the US's large current account and fiscal deficits, and the possibility of a destabilising financial market reaction, are a matter for concern at the Fed, but those deficits are not a direct target of central bank policy.

Long-term interest rates are lower now than when the Fed started its tightening cycle last summer. While the dollar has weakened over the past two-and-a-half years there was only limited signs of this feeding into inflation.

The Fed's preferred measure of inflation - the core personal consumption expenditures (PCE) index which excluded food and energy items - rose by 1.5 per cent in the 12 months to December, down from 1.6 per cent in November. That is right in the middle of the presumed Fed comfort range of 1-2 per cent for the core PCE index.

The special subject of the two-day meeting was the pros and cons of introducing a formal inflation objective.

Mr Greenspan may give a preview in his testimony, or other Fed policymakers in their public appearances. The central bank is keen that the policy statement that accompanies their rate decisions remains the chief communication tool, rather than the minutes, which are seen as a less reliable guide.

FOMC members are broadly comfortable with the pace of future rate increases being priced in by the market, and there are concerns that the uncertain outlook for productivity growth makes it difficult for the central bank to forecast the inflation outlook.