Fed raises interest rates again
WASHINGTON (AP)—The Fed
eral Reserve boosted interest rates
Wednesday for the seventh time in a
year, triggering higher borrowing
costs for millions of Americans and
charges of monetary overkill from
critics.
The Fed’s half-point increase in
two key rates was followed immedi
ately by a similar boost by major
banks in their prime lending rate,
pushing it from 8.5 percent to 9 per
cent, the highest level for this bench
mark rate since early 1991.
Many home equity and credit card
loans are tied to the prime, as are
certain business loans, especially for
small and medium-sized firms.
In a brief announcement at the end
of two days of closed-door discus
sions, the Fed said it was increasing
its discount rate, the interest the bank
charges on direct loans to commer
cial banks, from 4.75 percent to 5.25
percent.
The central bank said it was in
creasing its target for the more im
portant federal funds rate, the inter
est that banks charge each other, by a
half-point to 6 percent.
When the Fed began this cycle of
interest rate increases on Feb. 4,1994,
the funds rate stood at 3 percent. The
latest increase means it has now been
doubled in just 12 months, even
though the underlying rate of infla
tion in the country has actually de
clined during the same period.
“The Fed is reacting not to infla
tion, but to the fears of inflation,”
protested Robert Brusca, an econo
mist at Nikko Securities in New York.
The year of rate increases is enough
“that we could see a recession in
1996,” he said.
Wall Street, which has at times
reacted wildly to the Fed’s rate in
creases, had a mixed reaction
Wednesday.
The Dow Jones industrial average
closed up 3.70. The bond market
slumped on fears that the Fed’s state
ment could mean the central bank will
stop raising interest rates before it has
decisively controlled inflation. The 30
year Treasury bond rose to 7.75 per
cent, up from 7.69 percent on Tuesday.
As it has in the past, the Fed de
fended its actions as necessary to
head off inflation in an economy that
is beginning to push up against ca
pacity constraints and tight labor
markets.
“Despite tentative signs of mod
eration in growth, economic activity
has continued to advance at a sub
stantial pace, while resource utiliza
tion has risen further,” the Fed said.
That referred to the fact the economy
grew at a rapid 4.5 percent annual
rate in the final three months of the
1994 while factories operated at their
highest capacity rates in 15 years.
“In these circumstances, the Fed
eral Reserve views these actions as
necessary to keep inflation contained
and thereby foster sustainable eco
nomic growth,” the statement said.
Fed critics, however, said the lat
est rate increase ignores the fact that
the substantial credit tightening al
ready engineered is just beginning to
be felt. Others defended it and pre
dicted it could well be the last or
next-to-last, especially if the economy
slows as expected this year.
But Democrats in Congress
charged that the Fed was favoring
Wall Street investors at the expense
of an economic slowdown that will
mean rising unemployment and lay
offs in such key sectors as housing
and autos.
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Mideast summit planned
JERUSALEM (AP) — The
leaders of Israel, Jordan, Egypt
and the Palestinians will meet for
an unprecedented summit Thurs
day to find ways to break the stale
mate in Mideast peace talks.
The four-way meeting will take
place Thursday afternoon in Cairo,
Prime Minister Yitzhak Rabin’s
office said Wednesday.
The summit was called to res
cue the peace process, which has
been shaken by attacks by Muslim
militants on Israelis and by Israel’s
settlement building policy.
Foreign Minister Shimon Peres,
in Cairo for talks with Egyptian
President Hosni Mubarak, said the
meeting would be “a real attempt
to create a coalition for peace and
not let the coalition against peace
stop it.”
“This is the first time a peace
coalition is meeting, consisting of
three countries and one autonomy,”
he said in other remarks broadcast
on Israeli radio.
“This is certainly an unprec
edented attempt in the annals of
the Middle East.”
In a nod to Syria, Peres said
“this coalition remains open for
others who want to join the peace
process.”
The stalled negotiations be
tween Israel and the Syrians will
also be on Thursday’s agenda, of
ficials said. However Egyptian
Foreign Minister Amr Moussa said
in Cairo that Syrian President Hafez
Assad had not been invited.
Palestinian officials confirmed
today that PLO leader Yasser
Arafat would attend. There was no
immediate comment from Jordan’s
King Hussein.
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