WASHINGTON - Federal Reserve officials voted 12 to 0 to raise short-term rates when they met Aug. 16 to review monetary policy, according to minutes of the Federal Open Market Committee that were released on Friday.

The unanimous decision included votes of approval from Fed vice chairman Alan Blinder and board governor Janet Yellen, both appointed earlier this year by President Clinton.

The action raised the federal funds rate to 4.25% from 3.75%. In addition, the Federal Reserve Board raised the discount rate to 4% from 3.5%.

The record showed that officials decided against a smaller rate increase because they were worried that financial markets would find it "inadequate" and build in further tightening, producing "uncertainty and volatility."

One surprise in the minutes was that members adopted a neutral policy directive, meaning one that dropped their bias in favor of higher rates. However, the officials said such a directive did not rule out further tightening if events warranted.

The FOMC met again last Tuesday, but the record of the meeting will not be available until Nov. 4.

Most officials at the August meeting said the economy was operating "at a level that was quite close to, if not already at, its long-run potential." Many also agreed that the risks of inflation "clearly were on the upside if the economic expansion did not moderate from its pace in recent quarters."

The officials said that so far, wage and price pressures were being contained but that there were growing signs of rising costs in the early stages of production and that more businesses were able to raise prices successfully.Treasury Market Yields Previous Previous Friday Week Month 3-Month Bill 4.76 4.89 4.656-Month Bill 5.41 5.40 5.001-Year Bill 5.92 5.87 5.512-Year Note 6.58 6.49 6.133-Year Note 6.86 6.78 6.415-Year Note 7.26 7.19 6.807-Year Note 7.43 7.38 6.9810-Year Note 7.59 7.55 7.1630-Year Bond 7.81 7.78 7.44

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