Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: WEDNESDAY, May 18, 1994                   TAG: 9405180106
SECTION: NATIONAL/INTERNATIONAL                    PAGE: A-1   EDITION: METRO 
SOURCE: The Washington Post
DATELINE: WASHINGTON                                LENGTH: Medium

FED RAISES 2 KEY RATES BY 1/2 POINT

In a statement, the Fed said its actions were "designed to maintain favorable trends in inflation and thereby sustain the economic expansion."

The Fed raised the discount rate, the rate the central bank charges on loans to financial institutions, from 3 percent to 3.5 percent. It lifted its target for the federal funds rate, the rate financial institutions pay one another on overnight loans, from 3.75 percent to 4.25 percent.

The financial markets reacted favorably, as the Dow Jones industrial average rose 49.11 points to close at 3720.61, and the yield on the benchmark 30-year Treasury bond dropped to 7.26 percent from its Monday close of 7.44 percent.

The rallies were sparked not so much by the increases themselves but by the Fed's statement that, "These actions, combined with the three [quarter-percentage point increases] initiated earlier this year ... substantially remove the degree of monetary accommodation which prevailed throughout 1993."

Investors and analysts interpreted that to mean the Fed may pause for a while before raising rates again, because the central bank has more or less achieved its announced goal of a "neutral" level of rates - rates that are neither stimulating nor restraining economic growth.

"Right now there is a sense of relief that it is over with," said Sung Won Sohn, chief economist at Norwest Bancorp in Minneapolis. "This has kind of been like that young man in Singapore getting lashes - the anticipation has been much worse than the actual beating. ... Now the Fed tightening is behind us, at least for a while."

Tuesday's move was the fourth rate increase since Feb.4. In a telephone interview Tuesday, Treasury Secretary Lloyd Bentsen said he used a Sunday tennis match with Fed Chairman Alan Greenspan to express concern that the extended series of incremental rate increases has had an adverse effect on market psychology.

"What I had said was that I didn't want to get into a Chinese water torture on interest rates," Bentsen said.

Bentsen denied published reports that he had lobbied Greenspan not to raise short-term interest rates again.

Tuesday's rate increases will be felt immediately throughout the economy. After the Fed acted, major banks raised their prime lending rate from 6.75 percent to 7.25 percent, which will make credit more costly for most business borrowers and for consumers with home equity loans and credit card balances tied to the prime.

On the other hand, if long-term interest rates, which dropped significantly Tuesday, stay down, rates on 30-year fixed-rate mortgages could fall somewhat. Rates on 10-year Treasury notes, which directly influence mortgage rates, fell by nearly two-tenths of a percentage point Tuesday.

Before the Fed's announcement, President Clinton said he did not believe slightly higher interest rates would hurt the economy. "I have every confidence that ... we will be able to offset any modest increase in interest rates with increased growth," he said.