By Dave Skidmore WASHINGTON - The Federal Reserve Board, in a move
to fight inflation, said Tuesday it was boosting its key bank
lending rate for the first time in nearly a year. Analysts said
other interest rates likely would head higher as a result.
With only three months left before the presidential election,
the board members, all appointed by President Reagan, sent a
dramatic signal that they were willing to push up interest rates to
dampen inflationary pressures even at the risk of endangering Vice
President George Bush's presidential aspirations.
The increase in the discount rate, from 6 percent to 6.5
percent, was adopted by a 6-0 vote and took effect immediately. It
was the first change since Sept. 4 and put the rate at its highest
in more than two years.
An increase in the discount rate, which is the fee the Fed
charges for short-term loans to member banks, is the central bank's
most direct way of pushing interest rates higher as a curb on
Economists said jumps in other interest rates, including those
on mortgage rates and credit cards, are likely to follow.
``This will hit consumer pocketbooks fairly soon,'' said David
Jones, an economist with Aubrey G. Lanston, a government securities
dealer in New York.
He said banks likely will raise their prime rate, the interest
they charge their most creditworthy commercial customers, this week
Since May, banks have raised their prime rate by a full point to
9.5 percent, the highest since March 1986.
And because more people are borrowing through home equity loans
and adjustable rate mortgages, which are tied to rate fluctuations,
consumers will feel the effects of the Fed's action much more
rapidly than in previous years, he said.
Investors, particularly foreign investors, have been skeptical
that the Federal Reserve would have the stomach to make such a move
with the presidential election on the line.
However, with this increase, Jones said, ``I think the Fed
proved beyond any reasonable doubt that it does have a backbone and
that it is willing to fight inflation even in an election year.''
At the White House, presidential spokesman Marlin Fitzwater said
the administration was disappointed with the increase, but he
refrained from criticizing Federal Reserve Chairman Alan Greenspan.
``We're always disappointed when interest rates go up, but we
understand there is a reason for it,'' Fitzwater told reporters.
``We think the Federal Reserve has done a good job. ... We think
the Fed's on the right course.''
The board, in a statement, said its decision ``reflects the
intent of the Federal Reserve to reduce inflationary pressures.''
Consumer prices, which rose 4.4 percent last year, are expected
to increase by more than 5 percent this year and perhaps more than 6
percent next year, analysts are predicting. …