Fed boosts US interest rates
HIGHER United States interest rates will slow economic growth in the second half of this year and in 1995, but the increases so far have not been large enough to threaten a recession, economists say.
These analysts say the economy will turn in respectable growth rates this year even though the Federal Reserve is tightening credit because of a stronger-than-expected start in 1994. It is that strength that prompted the central bank to move April 18 for the third time since early February to boost a key short-term interest rate by one-quarter percentage point. That was followed by a half-point increase by major banks in their prime lending rate, a benchmark for many business and consumer loans.
The latest tightening move, which pushed the Fed's target for the federal funds rate up to 3.75 percent, had the same effect on Wall Street as the previous two rate increases - it sent both stock and bond prices tumbling. The Dow Jones industrial average fell by 41.05 points and the yield on the benchmark 30-year Treasury bond jumped to 7.42 percent, the highest level of the Clinton presidency.
Some analysts say the Fed could move soon to boost rates again. But some suggest that could be the last increase for awhile, on the theory that the economy will be showing signs of slowing down. One of the reasons the Federal Reserve has been tightening credit conditions has been to slow down business investment spending and consumer sales. The danger, however, is that the central bank will overdo the tightening and slow growth so severely that the chances of a recession will increase.