Fed Decides Against Further Increase in Interest Rates : Banking: Observers say Orange County’s bond crisis was a factor in forgoing a seventh hike this year.

The Federal Reserve Board refrained Tuesday from increasing interest rates, evidently postponing the next such move until 1995 to avoid stirring up financial markets in the wake of the Orange County bond debacle.

Although Fed officials did not explain their thinking, close observers said that a few factors, among them the Orange County financial crisis, argued against hiking rates immediately.

Inflation has remained under control, recent statistics suggest. In addition, the Fed likely wants to let more time pass before it pushes up rates again. The last rate hike--the sixth this year--came five weeks ago.

“I think the Fed has reasons for waiting,” said Bruce Steinberg, senior economist at Merrill Lynch in New York. “Usually after they have done a big move, they let a little time pass before moving again.”

The Fed decision--which had the side effect of stabilizing some of Orange County’s investments--was made by the board’s Open Market Committee.

The bonds that remain in Orange County’s portfolio are extremely sensitive to rising rates, and would have fallen further in value if the Fed had increased rates Tuesday.

The policy-setting panel, composed of Fed board members and five of the 12 regional bank presidents, met for more than three hours before adjourning its final meeting of the year without announcing an increase.

In previous rate increases this year, the Fed announced the decision immediately after deliberations by the committee.

Nonetheless, economists widely expect an additional rate hike in early 1995, perhaps of half a percentage point, because the national economy continues to exhibit enough strength to stoke inflation fears.

Since Feb. 4, the Fed has moved six times to increase rates--most recently on Nov. 15, when two key rates were raised by three-fourths of a percentage point.

Some economists forecast that an influential short-term rate--the federal funds rate--is headed to 6.5% from its current 5.5%, before the Fed is satisfied that inflation dangers are over for the time being.

A slower economy, however, is the price of conquering the inflation fears: “If the Fed goes much higher than they are now, then we will be entertaining a significant chance of a recession,” said Sung Won Sohn, chief economist of Norwest Corp. in Minneapolis.

Analysts point to history as cause for concern.

There have been nine recessions since World War II; on only two occasions, in the 1960s and 1980s, was the Fed able to pull off its goal of a “soft landing”--taming inflation while also preserving economic growth.

Still, some are optimistic that the Fed can engineer a slower pace of growth without a slump in the current episode.

“If we get the slowdown that we are expecting, then I think we can get another three years of expansion before we have to worry about the next recession,” said David Wyss, an economist at DRI-McGraw Hill.

The policy-making committee is scheduled to meet next on Jan. 31 and Feb. 1.

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The Associated Press contributed to this report.

* STOCKS STUMBLE

The Fed’s decision not to raise rates failed to prevent stocks from falling. D2