Fed interest-rate hike may edge up consumer loans
Starting today banks are going to have to pay higher interest charges when they borrow from the Federal Reserve. The change could add a bit of fuel to the existing upward pressure on consumer loan rates, analysts say.
Late Friday the Fed announced that beginning April 9, banks borrowing at regional Federal Reserve banks' discount windows will pay 9 percent for funds, instead of the 8.5 percent rate in effect since late 1982.
The move underscores the Fed's determination ''to maintain moderate money and economic growth in the second year of the recovery with the aim of keeping inflation in check,'' says David Jones, senior vice-president of Aubrey G. Lanston, a government securities dealer. He says it shows that the Fed ''is prepared to tighten further if needed,'' despite election-year pressure not to.
Ironically, the Fed's move came the same day one major economic indicator, the unemployment rate, showed the economy seems to be cooling off. In March the civilian jobless rate held steady at 7.8 percent. And the number of new jobs created by the economy dropped from 700,000 in February to 200,000 in March.
The move to a higher discount rate was widely expected by money-market experts, since, as the Fed announcement noted, the fee was well below other interest charges, which recently have risen sharply. The Fed cited this gap in announcing the change.
The discount window looked like a bargain to banks compared to the federal funds rate, the fee the banks charge each other for overnight loans. Last week, federal funds traded as high as 10.75 percent. As a result, discount-rate borrowing surged.
Analysts say Fed officials probably do not view the higher discount rate as an additional credit-tightening step, but rather as confirmation of a move to greater tightness taken at their monetary strategy-setting session two weeks ago. ''I don't think they see this as a new move to tighten credit,'' says Ben E. Laden, chief economist at T.Rowe Price Associates.
Whatever the Fed's intent, analysts say credit markets may react to the move by bidding up other interest rates a bit today, and the Fed's action also may further depress the stock market. Mr. Laden says the resulting move in other interest rates could be as much as one quarter of a percent early in the week.
Even if the discount move does not cause an additional blip in rates, consumers will face higher borrowing fees as a result of the recent upward movement in the prime rate, which last week moved to 12 percent. Laden notes that rates on auto loans and other consumer borrowing are closely tied to the prime rate. And Mr. Jones says the prime rate could move as high as 14 percent by June due to tighter monetary policy and a collision between corporate and government borrowing.