WASHINGTON - Federal Reserve policymakers took the first step in what they signaled should be a slow rise in interest rates. Even with the Fed's first rate increase in four years, costs to borrow money still remain a pretty good deal for Americans.

The modest one-quarter percentage point increase ordered Wednesday nudged up a key short-term interest rate controlled by the Fed to 1.25 percent, from a 46-year low of 1 percent.

In response, commercial banks, including Wells Fargo and Wachovia, announced that they were boosting their prime lending rate by a corresponding amount - to 4.25 percent, from 4 percent. The prime rate, a benchmark for many short-term consumer and business loans, also hasn't gone up in four years.

For savers, who have been stuck with measly returns over the past several years, the Fed's decision means they will earn a bit more interest on bank accounts, certificates of deposit and other savings products.

"The first interest rate hike in four years is long overdue in the eyes of depositors," said Greg McBride, a financial analyst with Bankrate.com, an online financial service. "However, it will take considerable action by the Fed before yields return to historical norms."

The nationwide average for a one-year CD is currently 1.50 percent, while the historical norm would be in the 3.5 percent to 4 percent range, he said.

Last June, the Fed pushed down its key short-term rate to 1 percent, marking the 13th rate cut in a series that began in January 2001. During that time, the Fed battled to help an economy staggered by a series of blows from a plunging stock market and the 2001 recession to terrorist attacks and two wars.

With the economic recovery now firmly rooted and the jobs climate improving, the Fed felt it was safe to start raising rates to head off inflation, which has been moving higher, analysts said.

The Fed suggested that for now it wasn't overly worried about inflation.

Against that backdrop, Fed policymakers were still of the view that they could raise rates gradually. But they also said they stood ready to act more aggressively should inflation prospects worsen, a point that has previously been made by Fed Chairman Alan Greenspan on several occasions.

Economists interpreted the Fed's remarks, taken all together, as boding for further, modest one-quarter point rate increases in the future, including one at the next meeting on Aug. 10.

Some economists predict the funds rate could rise to 2 percent by the end of this year, which would mean the prime rate would move up by a corresponding amount to 5 percent.

The economy has been a hot topic in the presidential campaign, with President Bush insisting things are rebounding and Sen. John Kerry talking about a squeeze on the middle class. Analysts said voters likely would see little impact on the economy between now and November from the Fed's action.