The Federal Reserve Board yesterday raised the interest rate it charges member banks to borrow from it, but said the action was not aimed at further tightening credit or slowing excessive economic growth.
Instead the nation's central bank said, the boost in the so-called discount rate to 6 per cent from 5.75 per cent was aimed at bringing the rate "into closer alignment with short-term rates generally."
The Federal Reserve was also seeking to discourage banks from borrowing the relatively cheap funds from the Fed and re-lending the money at higher rates. The rate on federal funds - excess reserves banks lend each other overnight - has been around 6.5 per cent.
The central bank noted that over the last five week, as the disparity grew between market interest rates and the discount rates member banks stepped up their borrowings from an average of $337 million to more than $1.8 billion in the week ended Oct. 19.
Last week of the New York Federal Reserve became concerned that some major New York City banks were engaging in such arbitrage - buying funds cheap in one market and selling them at a higher price in another.
The Fed reported called several of the banks to discourage them from the practice.
Henry Kaufman, chief economist and senior partner of the investment banking concern of Salomon Brothers, said the central bank has been "caught in a dilemma of trying to assess why the money supply has been going up and economic growth has been slowing."
As a result, Kaufman said, the Federal Reserve has "paused" in recent weeks in its attempts to raise interest rates to slow the growth of credit and the money supply.
It was the second time in the last two months that the central bank has raised the discount rate. In late August it boosted the rate from 5.25 per cent to 5.75 per cent citing the same reasons it mentioned yesterday: to bring it into closer alignment with other interest rates and to discourage banks from borrowing from the Fed to re-lend.
Other interest rates have been rising, however, because the Federal Reserve Board had been tightening credit in an attempt to halt what it considers to be excessive money growth.
The Fed tightens monetary growth by permitting the federal funds rate to rise.
It sets a target federal funds rate that it thinks is consistent with the proper level of banking system reserves off which banks can make loans.
The Fed tightens credit by selling government securities to banks, sopping up funds which banks might otherwise lend. As reserves are pulled from the system, banks with a shortage of reserves hid up the amount they will pay for federal funds (excess reserves of other banks).
Since the middle of July the federal funds rate has climbed from about 5.5 per cent to 6.5 per cent. However, during the same period the money defined narrowly as checking accounts and currency in circulation has increased about $10 billion. The more broadly defined money supply, which also includes savings deposits in banks, has jumped about $13.5 billion.
At the same time the Carter administration has voiced its concern about rising interest rates. Last week the White House said that while rising interest rates do not appear to have hurt the recovery yet, they could soon begin to choke it off if they continued to rise.