The Federal Reserve yesterday increased short-term interest rates a quarter percentage point, the 12th such increase since June 2004, putting the target federal funds rate on overnight bank loans at 4 percent, its highest level in more than four years.

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But while major banks including PNC Financial Services Group and Mellon Financial were quick to follow suit, pushing up their prime rates used to set business and consumer loans by an identical quarter point to 7 percent, businesses for the most part seemed to shrug off the added cost.

"The Fed's tightening has had little impact on the business conditions that matter to business," said Cliff Waldman, economist for Manufacturers Alliance/MAPI, an Arlington, Va. research group. "Financial conditions remain easy."

Argus Research Chief Economist Richard Yamarone believes Fed policy has prompted some businesses to reduce spending, but that higher rates have not had a major impact on their capital expenditure budgets or on the economy.

"It's not a crippling situation. It's more of an irritant," he said.

The Commerce Department last week reported the nation's economy grew at a surprising 3.8 percent rate in the third quarter despite the impact of three major hurricanes, and two reports issued yesterday confirmed the economy is healthier than many believed it would be two months after Hurricanes Katrina and Rita.

The Institute for Supply Management said that while the nation's manufacturing sector grew at a slower pace in October because of rising energy and raw materials prices, it nonetheless grew at a healthy rate. Its manufacturing index dropped to 59.1 percent, down from 59.4 percent in September. A reading of about 50 indicates the economy is expanding.

Separately, the Commerce Department said construction spending reached another record high in September, rising 0.5 percent.

A major reason the economy has held up in the face of the Fed's aggressive moves -- the target federal funds rate stands at 4 percent, up from 1 percent when the central bank began raising rates 17 months ago -- has been the stubborn resistance of long-term interest rates to follow suit.

Outgoing Fed Chairman Alan Greenspan and economists have been perplexed about why mortgage rates and yields on 10-year and 30-year Treasuries haven't moved more in tandem with short-term rates, but home buyers and business borrowers seeking to fund major projects aren't complaining.

Rates on 30-year mortgages have risen only about 0.5 percentage points over the last year, said John K. Milne, chief executive officer of JKMilne Asset Management, a Station Square investment manager. And yields on the benchmark 10-year Treasury note have remain lower than they were when the Fed began raising short-term rates, closing yesterday 4.58.

Economists say the unbroken streak of short-term rate increases has worked to keep inflation under control despite spikes in energy prices, and the Fed indicated yesterday it will continue raising rates at a measured pace to keep inflation in check.

"The cumulative rise in energy and other costs have the potential to add to inflation pressures," the bank said in a statement.

Mr. Yamarone expects short-term rates will hit 5.5 percent by July or August, and economists say at some point the Fed's incremental increases run the risk of taking a bigger bite on business conditions and slowing the economy too much.

"The question is: Do you get collateral damages?" said Mr. Milne.

Cliff Shannon, president of SMC Business Councils, said members of the Churchill-based small business group tell him that so far, they haven't been bothered much by the higher rates. Business has been strong enough to offset increased borrowing costs, he said.

But members aren't as optimistic as they usually are about the future, Mr. Shannon said. Their worries include higher interest rates, budget deficits that could send interest rates higher, and energy prices.

"At the moment, nobody is fixated on interest rates, but they are a nagging worry," he said. "When they look 12 months out, there is not as much optimism as you might expect."