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Greenspan Leaves Door Open

In the chairman's last meeting, the FOMC raises fed funds to 4.5% and hints at another hike.
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Updated from 2:35 p.m. EST

Federal Reserve

policymakers, acting under Alan Greenspan's supervision for the last time, bumped up official interest rates by a quarter-point Tuesday and left the door open for another hike in March.

The official fed funds rate was raised to 4.5%, its highest level since May 2001. In an accompanying statement, the

Federal Open Market Committee

did little to alter the landscape faced by incoming chairman Ben Bernanke, saying another rate hike is possible if conditions warrant.

"The committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the FOMC said. "In any event, the committee will respond to changes in economic prospects as needed to foster these objectives."

In its last statement on Dec. 13, the Fed said that "some further measured policy firming is likely to be needed" to meet those goals.

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Tuesday's statement was the first since May 2004 not to use the adjective "measured" in describing the pace of future hikes.

Greenspan, who led the Federal Reserve for more than 18 years under four presidents, steps down as chairman Tuesday. His legacy of steady stewardship through boom and bust is inherited by Bernanke, the MIT- and Princeton-educated academic picked by President Bush last fall.

Bernanke has championed the cause of transparency at the Fed but now faces the challenge of establishing credibility with financial markets, which over two decades have grown intimately acquainted with Greenspan's linguistic habits. The FOMC was widely expected to leave Bernanke with "wiggle room" to establish his own tone.

The FOMC statement Tuesday made clear that Bernanke's first moves will take their cue from data emanating from a growing, if changeable, economy.

"Although recent economic data have been uneven, the expansion in economic activity appears solid," it read. "Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures."

The markets' first question concerns the next FOMC meeting on March 28. Prior to Tuesday's decision, fed funds futures had priced in a 76% likelihood of another quarter-point rate hike at the March confab.

Stocks fell moderately following the announcement, with the

S&P 500

going from down 3 points to down 5 points at the close. The yield on the 10-year Treasury bond went from 4.52% to 4.53%.