Federal Reserve Board Ups Discount Rate to 6.5% for Inflation Fighting
Dave Skidmore, Ap, THE JOURNAL RECORD
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 economic growth.
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 or next.
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. …