The move won't directly affect borrowing costs for millions of Americans. But with the worst of the crisis over, it brings the Fed's main crisis lending program closer to normal.
The Fed decided to bump up the so-called "discount" lending rate by one-quarter point to 0.75 percent. The increase takes effect Friday.
The central bank said the action should not be viewed as a signal that it will soon boost interest rates for consumers and businesses. Record-low borrowing costs near zero are still needed to foster the recovery, it said. It repeated its pledge to keep interest rates at "exceptionally low" levels for an "extended period."
The Fed had signaled for weeks that an increase in the discount rate was coming. It portrayed its action Thursday as moving its emergency program for banks closer to normal.
The announcement came after the financial markets had closed Thursday. Investors saw it initially as a prelude to higher borrowing costs across the board.
In after-hours trading, the dollar strengthened on the expectation of higher rates. And yields on two-year Treasury securities rose, and stock futures dipped.
After the sell-off in stock futures, Pimco Managing Director Bill Gross warned investors not to overreact.
"I'd accept the Fed at its word -- that this isn't a change in monetary policy or in the timing of it," he said. "Calmer heads may prevail tomorrow."
T.J. Marta, a market strategist, said he thinks higher interest rates for American borrowers are months away. But "I think one man's normalization is another man's tightening," he said of investors' initial anxiety.
The Fed has kept the target range for its main interest rate -- called the federal funds rate -- at between zero and 0.25 percent since December 2008.
After the Fed's action Thursday, economists said they continued to believe it won't start to boost borrowing costs for Americans until later this year. Some don't think that will happen until next year, given the fragile economic recovery.
When the time does come, Bernanke said the Fed will likely start to tighten credit by raising the rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks' prime rate and affect many consumer loans. That would mark a shift away from the federal funds rate, its main lever since the 1980s.
Steering interest rates through the excess reserves rate, now at 0.25 percent, gives the Fed more control over money floating around the financial system. The Fed sets that rate directly; its funds rate is just a target.
"I don't think the Fed funds rate will increase until 2011," Gross said.
The economy is growing again, and financial conditions have improved. But unemployment is still near double digits, and demand for loans remains weak. Many ordinary Americans and small businesses have found it difficult to borrow.
When credit virtually shut down starting in 2008, banks that wanted to borrow had nowhere to go except the Fed. Banks can now more easily tap private lending sources than they could then. As a result, the Fed feels more comfortable about boosting the rate banks pay on emergency loans.
Because financial conditions have improved, the Fed also said it will shorten the length of loans drawn from its emergency lending program. It will go back to overnight loans, effective March 18.
Earlier this month, the Fed shut down a handful of programs to help banks and other companies access credit. Like those shutdowns, the action announced Thursday is "intended as a further normalization of the
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or monetary policy," the Fed said.
Banks have been scaling back their use of the Fed's emergency "discount" loan window as conditions have improved. At the peak of the crisis in the fall of 2008, daily borrowing from the discount window reached $110 billion.
Commercial banks averaged $14.3 billion in daily borrowing for the week that ended Wednesday, the Fed said in a weekly report Thursday. That was down from $14.6 billion in average borrowing for the previous week.
Congress has demanded the Fed identify the banks that draw emergency loans. The Fed has resisted. Bernanke and his colleagues have argued that revealing the names of banks that take out the emergency loans could cause a run on the institution.
Created by Congress in 1913 after a series of bank panics, the Fed acts as "lender of last resort" to banks that can't borrow elsewhere. Its actions help stabilize the nation's financial and economic systems. The Fed's decisions on interest rates can affect the ability of both companies and individuals to borrow and spend.
The wind-down of Fed programs earlier this month, most of which had fallen out of use, was little noticed by investors. A bigger impact could be felt by the scheduled shut-down of the Fed's program to buy mortgage securities from
The purchases of mortgage securities have lowered home-loan rates and bolstered the housing market. The Fed has held the door open to extending the program if the economy weakens. Some analysts fear that once the program ends, mortgage rates could rise, hurting the recovery in housing and the overall economy.
Rates on 30-year mortgages averaged 4.93 percent this week, down from 4.97 percent last week,
David Rosenberg, chief economist at money manager Gluskin Sheff in Toronto, says the Fed's decision to bump up the emergency lending rate for banks is psychological but still packs a punch.
"The Fed is moving toward a new strategy of draining liquidity from the system," he says. "Will the Fed be raising the Fed funds rate soon? No. But what happens when it stops buying mortgages or even starts selling? That could have a material impact on mortgage rates."