WASHINGTON -- U.S. Federal Reserve policy makers have agreed to push up short-term interest rates, taking a second preemptive strike against inflation amid a strong economic recovery.


The news Tuesday signalled that the U.S. central bank is ready to allow the key federal funds rate, which influences the price of money throughout the economy, to rise another quarter of a point to 3.50 percent, analysts said.


It was the second credit tightening since Feb. 4 when the central bank began reversing five years of easy money.


Financial markets around the world heaved a sigh of relief. They were keenly awaiting another signal that the Federal Reserve will stand firm to prevent inflation now that the U.S. economy is expanding at a 4 percent annual rate.


"The Fed is saying growth was a bit too strong and needed some tapping on the brakes," said High Frequency Economics economist David Munro.


Slowing the rate of growth to about 3.0 percent should stop price pressures from building this year, analysts said.


The dollar jumped and the stock market reaction was mixed. Inflation is a financial bogeyman because it erodes the long-term value of fixed investments.


Just as it had a month ago, the Fed took the unusual step of formally announcing its intentions immediately after its key policy-setting meeting.


"Chairman Alan Greenspan announced today that the Federal Open Market Committee decided to increase slightly the degree of pressure on reserve positions," the statement said.


"This action is expected to be associated with a small increase in short-term money market interest rates."