WASHINGTON -- Federal Reserve officials yesterday showed their determination to slow the pace of U.S. economic activity by :boosting short-term interest rates for the sixth time this year.
Members of the Federal Open Market Committee raised the federal funds rate, which banks charge each other for overnight loans, to 5.50% from 4.75%. The increase, which was greater than most analysts expected, occurred after two government reports came out suggesting that the economy is continuing to roll along in high gear.
In addition, members of the Federal Reserve Board voted 7 to 0 to raise the discount rate by 75 basis points, to 4.75%. The rate affects what banks pay to borrow directly from the Fed to meet reserve requirements.
"These measures were taken against the background of evidence of persistent strength in economic activity and high and rising levels of resource utilization," a Fed statement said. "In these circumstances, the Federal Reserve views these actions as necessary to keep inflation contained, and thereby foster sustainable economic growth."
Commercial banks quickly responded by raising the prime lending rate to 8.5% from 7.75%. Many home equity lines of credit and other loan rates paid by consumers and small business are tied to the prime.
The Fed's credit-tightening drew no protests from the Clinton Administration, which said the economy continues to perform well with low inflation. Treasury Secretary Lloyd Bentsen and Laura D'Andrea Tyson, head of the president's Council of Economic Advisers, both issued statements saying the Fed must remain an independent agency in setting rates.
However, a group of protesters organized by the AFL-CIO and othergrass-roots organizations staged a sidewalk demonstration outside the Fed's main office building while FOMC members were meeting inside. The group, which included Sen. Byron Dorgan, D-Neb., urged officials to refrain from raising rates again.
"Regrettably, the Fed's actions have actually pushed up long-term rates and destabilized financial markets, endangering the economic prospects of millions of citizens," the group said in a statement. "The cost of mortgages and other loans has risen. Meanwhile, inflation has remained virtually nonexistent."
Analysts said that Fed chairman Alan Greenspan and his colleagues appeared to be responding to continuing bond market worries that inflation will pick up unless the economy is forced to slow.
The meeting of the 12-member FOMC came after the Commerce Department reported that retail sales in October surged 1.1%, which was well above market expectations. The report said consumer purchases of autos, furniture, home-building supplies, and other durable goods remained strong.
Separately, the Fed reported that industrial production took off again in October, after a pause in September that was influenced by a strike at several General Motors plants. Total output increased 0.7%, with most of the gain coming in the manufacturing sector, and the operating rate for U.S. industries climbed to 84.9% of capacity the highest reading in 14 years.
"The signs of recent activity show that the pace seems to have picked up," said C. Douglas Lee, chief economist for NatWest Washington Analysis. "We have gotten quite a bit tighter in the labor market in the last couple of months, and the manufacturing sector has moved ahead pretty strongly."
By raising short-term rates 75 basis points, the Fed took its most aggressive step to date this year in tightening credit. The first move by the central bank lifted the federal funds rate to 3.25% from 3% on Feb. 4, followed by similar increases of 25 basis points in March and April. In May, the Fed raised rates half a percentage point to 4.25%, and again by the same amount to 4.75% in August.
Despite an increase in short-term and long-term rates to the highest level in over three years, the economy has continued to surprise analysts with its strength. Consumer spending has remained buoyant, and Christmas holiday sales are expected to be strong. Home sales have also held up well.
Analysts said one reason for the economy's continued strength is that banks have regained their profitability and are lending freely again on easier terms that offset some of the impact from rising rates. "The banking industry is back on stream again in terms of providing credit to the economy, and the Fed hasn't put its foot on the brake enough," said Paul Kasriel, vice president for Northern Trust Co. in Chicago.
Kasriel said banks have been supplying credit at an annual rate of 6.9% so far this year, up from 4.9% in 1993 and 3.7% in 1992.
With foreign economies recovering., demand is also rising for U.S.-made capital goods such as computers, said Richard Berner, chief economist for Mellon Bank in Pittsburgh.
