Fed raised rate with eye on markets LTC

October 01, 1994|By New York Times News Service

WASHINGTON -- The decision by the Federal Reserve's top interest-rate policy committee on Aug. 16 to raise short-term interest rates by half a percentage point was unanimous and based partly on concerns that a smaller move would disappoint financial markets, according to a summary of the meeting issued yesterday.

"Consideration was given to a lesser adjustment in reserve conditions," said the summary, which is written in central bank and financial market jargon. "Reserve conditions" and "further monetary tightening" both can be read as interest rate increases.

"But the members concluded that a smaller step was unlikely to be adequate," the Fed's official report on the Aug. 16 meeting said, "and on perceiving this, financial markets would quickly build in further monetary tightening, the unknown size and timing of which would add to market uncertainty and volatility."

Bond traders and analysts had said at the time that a smaller increase might make the central bank look soft on inflation and send long-term interest rates higher as investors worried that inflation would erode their returns.

Marc W. Wanshel, an economist at J. P. Morgan in New York, said yesterday that this concern at the Fed was significant because it meant that the Fed might continue its apparent pattern since May of raising interest rates in half-point increments every two months. By contrast, the Fed raised rates by a quarter-point in February, March and April this year.

"It would seem to suggest that when they move again, they'd go half a point," he said, predicting that the next move could come in October or, at the latest, at the policy committee's next meeting on Nov. 15.

The panel, officially known as the Federal Open Market Committee, met Tuesday but adjourned without changing interest rates.

On Aug. 16, the committee raised its target for the federal funds rate to 4.75 percent from 4.25 percent. Banks pay the federal funds rate for overnight loans from other banks, and the Federal Reserve indirectly controls this rate by buying and selling government bonds, thereby adding or subtracting from banks' reserves of lendable cash.

The Fed had previously raised the federal funds rate by half a percentage point on May 17 and by a quarter percentage point each on Feb. 4, March 22 and April 18.

The Fed's concern about financial markets' reaction to a possible small increase on Aug. 16 irked Democratic members of Congress who have already been critical of higher interest rates. "I think this just bears out and is confirmation of the view that the Fed is overly concerned about Wall Street's reaction and not concerned enough about what's happening on Main Street," said Sen. Jim Sasser, the Tennessee Democrat who is the chairman of the Budget Committee.

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