The Federal Reserve, sticking to a course of gradually raising rates, boosted its key federal funds rate by one-quarter of a percentage point to 3 percent on Tuesday. It was the eighth increase of that size since the Fed began to tighten credit last June, and it left the rate at the highest level since the fall of 2001.

In response, commercial banks began raising their prime lending rates, which are used for many short-term consumer and business loans, by a corresponding amount to 6 percent, also the highest sine 2001.

The federal funds rate, the interest banks charge each other on overnight loans, is now triple the 1 percent rate - a 46-year low - that prevailed before the Fed embarked on its rate-raising campaign.

Some economists believe the funds rate could rise to 4 percent by the end of this year. If so, that would push up the prime rate to 7 percent. While that would still be considered low by historical standards, it not doubt would make clear the days of rock-bottom borrowing costs are gone.

''Costs to borrow money are going up, but borrowing conditions are still good,'' said Carl Tannenbaum, chief economist at LaSalle Bank.

Fed policy-makers, walking a tightrope, are confronted with two challenging economic forces: rising inflation pressures on the one hand and slowing economic growth on the other.

Higher interest rates are a defense against rising inflation. But when it is more expensive to borrow money, some consumers and businesses are less inclined to spend and invest, factors that would further chill an already cooling economy.

The policy-makers acknowledged in a brief statement that the economy had hit a rough patch in early spring. ''The solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices,'' they said.

''Pressures on inflation have picked up in recent months and pricing power is more evident,'' the statement said, a reference to businesses finding it easier to raise prices to customers. But it tempered that inflation warning with an assessment that longer-term inflation expectations remain ''well contained.''