Fed boosts discount and funds rates half a point.

The Federal Reserve Board lifted interest rates again Tuesday, bidding to preempt inflation by slowing economic growth, calming the nervous bond market, and steadying the dollar.

In a bold announcement coinciding with a meeting of the Federal Open Market Committee the Fed said it had increased the discount rate immediately on loans to member banks, to 3.5% from 3%. It similarly raised its target for the overnight loan rate on bank reserves, the federal funds rate, to 4.25% from 3.75%.

Markets Pleased

Securities markets responded sharply and positively. Bank stock prices joined the rally on expectations - fulfilled by day's end - that major money-center and regional institutions would follow with increases in their prime rates.

The lead bank. units of Citicorp, Bank of New York Co., First Chicago Corp., and numerous others posted 50-basis-point increases, to 7.25%.

In the bond market, long-term rates fell as the price jumped sharply on the benchmark 30-year Treasury bond.

Tuesday's credit tightening was the Fed's fourth in as many months and by far the most dramatic. The discount rate had not risen in more than five years and had declined seven consecutive times since 1989.

"This relieves the tension," said Frank J. Barkocy, senior bank analyst at Advest Inc. "The market can handle good news or bad news, but it cannot deal indefinitely with uncertainty.

"This gets the uncertainty out of the way, and we can now get on with the business of doing business," Mr. Barkocy said.

"Is the Fed move justified by economic data? No," he said. "Is it the right thing to do? Yes, if it gets this all behind us."

With the half-point rate move, "the Fed has clearly signaled its goal of preventing inflation from rising," said Mickey D. Levy, chief financial economist at NationsBank Corp.

"But I think the market also perceives this is the Fed's last move for a while, after having opted not to stretch things out" with a smaller rate increase, he said.

"Thus far, the market reaction has been to applaud," said Eugene J. Sherman of M.A. Schapiro & Co., New York. "Long rates are coming down, and lower long rates will be more influential in sustaining the economy than higher short rates will be in derailing it.

"The dollar is also stronger, and that will help sustain the strength of both the stock and the bond markets," he said. "It's very positive for the U.S. economy."

In Washington, Rep. Henry Gonzalez, D-Tex., was less sanguine. The House Banking Committee chairman said the Fed gave in to an "irrational impulse" to raise rates and warned of a repeat of the recession that followed a 1988 rate increase.

The central bank disclosed its tightening policy at about 2:30 p.m. in Washington, after the regularly scheduled meeting of the open market committee, which monitors business conditions and adjusts monetary policy.

That meeting had been the almost singular focus of Wall Street's attention for the past several weeks. Both the discount rate and fed funds moves were anticipated in the financial markets.

The Fed did not categorically say it has reached Chairman Alan Greenspan's goal of "neutrality" in monetary policy - a level of rates that is neither stimulative nor punitive for the economy.

In its statement, the Fed declared: "These actions, combined with the three adjustments initiated earlier this year by the FOMC, substantially remove the degree of monetary accommodation that prevailed throughout 1993."

The discount rate was last increased on Feb. 24, 1989, when it moved to 7% from 6.5%. The rate was last changed on July 2, 1992, when it was reduced to 3% from 3.5%. It had reached 3.5% after being reduced from 4.5% on Dec. 20, 1991 - a dramatic drop that helped trigger a sustained rally in bank stock prices.

The Fed had previously raised its fed funds target by 25 basis points three times - Feb. 4, March 22, and April 22.

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