WASHINGTON -- The U.S. Federal Reserve has increased key interest rates three-quarters of a percentage point in its most dramatic move yet to slow the surging economy and prevent a new cycle of inflation.


The Fed's rate increase, the sixth this year and the largest in 13 years, was immediately matched Tuesday by similar 0.75 percentage point increases in major banks' prime lending rates.


Financial markets had a mixed reaction to the larger-than-expected rate increase.


The Dow Jones industrial average finished the day down 3 points. The beleaguered dollar rallied on currency markets and U.S. Treasury's benchmark 30-year bond, a sensitive barometer of inflation concerns, posted a slight gain as well.


The Fed increased its target for the federal funds rate, the interest that banks charge each other, from 4.75 percent, where it had been since Aug. 16, to 5.50 percent.


Since Feb. 4, the federal funds rate, which started the year at 3 percent, has risen by 2.5 percentage points.


The Fed also boosted its discount rate, the interest the central bank charges for direct loans, by three-quarters of a point to 4.75 percent.


It marked the biggest jump in the Fed's discount rate since it was raised a full percentage point in May 1981, a period when the central bank was pushing interest rates to their highest level since the Civil War in an effort to attack double-digit inflation.


The Clinton administration, which since taking office has refrained from criticizing the Fed, was restrained in its comments.


Both Treasury Secretary Lloyd Bentsen and White House Chief Economist Laura D'Andrea Tyson issued statements emphasizing the Fed's independence.


"The administration and the Federal Reserve share a common goal of steady growth with low inflation," said Bentsen.


Tyson said, "The news on the economy is very good. The buoyant investment-led expansion continues."


However, Fed critics accused the bank of overkill, saying the Fed's tight-money policies were increasing chances of a recession. They said that with consumer prices rising this year at a modest rate of 2.8 percent, there was no justification for a rate increase of this magnitude.


"The Federal Reserve took another big step toward cutting the legs out from under the economy," said Martin Regalia, chief economist at the U.S. Chamber of Commerce. He said the economy was headed, if not for an outright recession, then for a growth recession in which the unemployment rate will begin to rise.


Even though Federal Reserve chief Alan Greenspan and other central bank officials acknowledge that there are few signs of rising prices, they believe that it is crucial for them to take pre-emptive action against inflation. Greenspan has argued that monetary policy acts with a long lag-time and that, if the Federal Reserve waits to strike until inflation is evident in the economy, it will be too late to stabilize prices. Suddenly raising rates at that point could disrupt economic activity.


The Federal Reserve's decision to get ahead of what it sees as "the inflationary curve" pleased some economists. "It was appropriate -- in fact it was overdue," said Cynthia Latta, an economist at DRI-McGraw Hill, an economic consulting firm based in Lexington, Mass.


"I think the Fed has had trouble keeping up with economic growth -- each month we seem to see higher forecasts -- and so the Fed decided to get ahead of it for once."


"It's a good move. It cleared the air of a lot of uncertainty in the markets about how far and how fast the Fed would go," added economist Scott Pardee, chairman of Yamaichi International (America), Inc.


After more than four hours of closed-door discussions by its key policy-setting Federal Open Market Committee, the central bank announced its decision in a brief statement. It said the action was "necessary to keep inflation contained and thereby foster sustainable economic growth."


The Fed said the increase in the discount rate was taken on a unanimous 7-0 vote of the Fed board.


The decision came on a day when the government reported that retail sales jumped 1.1 percent in October and U.S. industry operated at 84.9 percent of capacity last month, the highest level in nearly 15 years.


Most major banks pushed their prime lending rates from 7.75 percent to 8.5 percent, the highest level for this benchmark rate since early 1991. Many home equity loans and small business loans are tied to changes in the prime rate. (AP, LAT)