Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, November 16, 1994 TAG: 9411170086
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: FROM STAFF AND WIRE REPORTS
DATELINE: WASHINGTON LENGTH: Long
The increases were expected to show up immediately in revolving home equity lines, some credit card rates and many other consumer rates. Most business borrowing is based on the prime.
First Chicago and Chase Manhattan became the first banks to boost their prime rates, from 7.75 percent to 8.5 percent. Analysts said other major banks quickly would follow suit in raising prime rates, the basis for many business and consumer loans.
Six of Virginia's seven major banks raised their prime lending rates to 8.5 percent Tuesday.
The increase was effective Tuesday at Crestar Bank, First Union National Bank, First Virginia Bank, NationsBank and NBC Bank; the change will go into effect today at Central Fidelity Bank.
Signet Bank said it will reach a decision on the matter today.
After a closed-door meeting of its policy-setting Federal Open Market Committee, the central bank issued a statement indicating it was pushing up two key rates.
The benchmark federal-funds rate, which banks charge each other on overnight loans, was increased from 4.75 percent to 5.50 percent. The Fed announced it also was raising its discount rate, the interest it charges to make direct loans to banks, by 0.75 percentage point as well, putting that rate at 4.75 percent.
The 0.75 percentage point increase in the two key rates was the largest Fed rate increase since May 1981, when it pushed the discount rate up to 14 percent, marking the fourth full percentage-point increase in a row as it was fighting to restrain the double-digit inflation rates of that era.
The Fed said the action to boost the discount rate was taken on a 7-0 vote.
On Wall Street, the Dow Jones industrial average initially rose on news of the rate increase, fell sharply minutes later, and then rose again. At 3 p.m., the average was up more than 3 points at 3,833.
In its statement, the Fed sought to signal its resolve to fight any reappearance of inflation, which so far this year has been running at a modest annual rate of 2.8 percent.
``These measures were taken against the background of evidence of persistent strength in economic activity and high and rising levels of resource utilization,'' the Fed said in a statement.
``In these circumstances, the Federal Reserve views these actions as necessary to keep inflation contained and thereby foster sustainable economic growth,'' the Fed statement said.
Immediately after the announcement, Treasury Secretary Lloyd Bentsen said, ``The administration and the Federal Reserve share a common goal of steady growth with low inflation. As we have indicated before, the Federal Reserve is an independent agency with authority to make monetary policy.''
In Indonesia where he was attending a trade meeting of Asia-Pacific leaders, President Clinton told reporters in advance of the rate increase that he believed the Fed would ``do their best to keep the recovery going.'' He said the United States has an economic-growth rate that is the envy of the world.
Speaking to reporters in Washington, White House Budget Director Alice Rivlin warned that the Republicans' promised $200 million in tax cuts, if they are not paid for, could send an inflationary shock wave through the economy that would force the Fed to raise interest rates further and abort the current recovery.
Rivlin said that with the country close to full employment, any sizable tax cut that was not offset meant that ``the inflationary dangers would be much more real'' and probably would be enough to ``throw the country into a recession.''
A Fed rate increase had been widely expected, partly because the economy has been so strong. The government reported Tuesday that retail sales shot up a surprising 1.1 percent in October and U.S. industry operated at 84.9 percent of capacity last month, the highest operating rate in nearly 15 years.
David Orr, chief economist in Charlotte, N.C., with First Union Corp., said he believed Federal Reserve Board members took such a large step so they wouldn't have to raise rates again at their next meeting, Dec. 20. A rate increase otherwise might have been needed then, but the Fed "didn't want to play Grinch" five days before Christmas, he said.
"I think it's a signal of how good the economy is," Orr said. The rates are going up because business is doing well. The increase, he said, "will not cause anyone not to borrow."
Still, there were critics who charged that the central bank's continued rate increases ran a growing risk of pushing the country into a downturn.
``Those who want to raise interest rates now are fundamentally misreading the American economy,'' said Jerry Jasinowski, president of the 12,800-member National Association of Manufacturers. ``They ought to get from behind their desks and see what's really happening in plants and on factory floors across the country.''
A diverse group of critics including the AFL-CIO, farm and consumer groups staged a rally outside the Fed headquarters on Constitution Avenue on Tuesday to protest the expected rate increase, marching with signs demanding, ``Jobs. Not Rate Hikes.''
Sen. Byron Dorgan, D-N.D., told the crowd that ``five times in the last nine months the Fed has decided that inflation lies somewhere over the horizon,'' even though ``all indices show inflation remains under control.''
Before Tuesday, the Fed had boosted the federal funds rate by 1.75 percentage points this year.
Orr predicted that the Federal Reserve will raise rates again by a half-point in late winter, perhaps as early as its Jan. 31 meeting, then again in the spring. Based on that outlook, he predicted the prime rate would be 9.5 percent by summer.
Staff writer Mag Poff contributed to this story.
by CNB