Fed Boosts Lending Rate; ‘Temporary Blip’: Reagan : Mortgage, Credit Card Hikes Seen

The Federal Reserve Board, in a move to fight inflation, today boosted its key bank lending rate from 6% to 6.5%, raising the likelihood that other interest rates, including those on credit cards and mortgages, will go higher too.

With only three months left before the presidential election, the board members, all appointed by President Reagan, sent a dramatic signal that they were willing to push up interest rates to dampen inflationary pressures even at the risk of endangering Vice President George Bush’s presidential aspirations.

At the White House, spokesman Marlin Fitzwater expressed disappointment but indicated the President believes the increase might be only a “temporary blip.”

“We are always disappointed when interest rates go up but we understand there is a sound reason for it,” Fitzwater said, but added, “The history of the last eight years has been that there have been these kinds of temporary blips.”

Stock and bond prices headed lower after today’s announcement while the dollar surged against all major foreign currencies. The Dow Jones average of 30 industrials finished the day down 28.27.

Adopted by 6-0 Vote

The increase in the discount rate was adopted by a 6-0 vote and took effect immediately. It was the second change under the reign of Alan Greenspan, who took over as Fed chairman a year ago. Last Sept. 4, the central bank boosted the rate from 5.5% to 6%, the first increase in three years.

That move was also taken in response to inflationary fears, but was later cited by some analysts as a contributing factor to the October stock market crash.

An increase in the discount rate, which is the fee the Fed charges for short-term loans to member banks, is the central bank’s most direct way of pushing interest rates higher as a curb on economic growth.

Economists said jumps in other interest rates, including those on mortgage rates and credit cards, are likely to follow.

“This will hit consumer pocketbooks fairly soon,” said David Jones, an economist with Aubrey G. Lanston, a government securities dealer in New York.

He said banks likely will raise their prime rate, the interest they charge their most credit worthy commercial customers, this week or next.

And because more people are borrowing through home equity loans and adjustable rate mortgages, which are tied to rate fluctuations, consumers will feel the effects of the Fed’s action much more rapidly than in previous years, he said.

Investors Skeptical

Investors, particularly foreign investors, have been skeptical that the Federal Reserve would have the stomach to make such a move with the presidential election on the line.

However, with this increase, Jones said, “I think the Fed proved beyond any reasonable doubt that it does have a backbone and that it is willing to fight inflation even in an election year.”

The board, in a statement, said its decision “reflects the intent of the Federal Reserve to reduce inflationary pressures.”

Consumer prices, which rose 4.4% last year, are expected to increase by more than 5% this year and perhaps more than 6% next year, analysts are predicting.

By making it more expensive to borrow money, the Fed hopes to check inflation by slowing consumer demand. High employment is putting more dollars in the hands of consumers.

At the same time, factories are operating at their highest capacity levels in eight years. They are straining to produce enough goods for both domestic buyers and foreigners, who have been buying more American products in response to the devaluation of the dollar through the end of last year.