In a move that could limit severely the amount of money available for home mortgages, four federal agencies yesterday reduced the interest rates that may be paid on the new six-month money market certificates issued by banks and thrift insititutions.
The action was intended to help reduce inflation stemming from what most Carter administration economists now believe is an overheated economy.
The administration wants to reduce mortgage funds to slow down the feverish pace of new housing construction. In addition, less mortgage money will mean fewer sales and refinancing of existing homes, a major source of consumer income for the past three years. That in turn should mean less consumer spending in coming months.
The agencies directed that, as of March 15, interest on the popular certificates, which are issued in $10,000 denominations, could no longer be compounded. Also, when the interest rate on six-month Treasury bills -- to which the rate payable on the money market certificates is keyed -- is 9 percent or more, the thrift institutions could not add their usual additional one-quarter percentage point.
The combined effect of the two changes will be to reduce rates on the certificates being paid this week by savings and loan associations and credit unions from more than 10 percent, when compounded, to about 9.4 percent.
The rate paid by banks will be reduced by a smaller amount equal only to the effect of compounding.
In recent months, the certificates have been responsible for maintaining savings inflows to thrift institutions, and for keeping home mortgage money available. Created only last June 1, the certificates accounted for $104.4 billion in investments at the end of January, and they now account for nearly 14 percent of all funds held by saving and loans.
The real problem with the certivicates was their success.
Since they were introduced the Federal Reserve Board, one of the four agencies announcing the changes, has progressively tightened its monetary policy, pushing up interest rates to combat inflation by slowing down economic activity.
But because of the certificates, housing remained almost immune, at least until very recently, despite mortgage rates of 10 1/2 percent or higher.
The question of whether to place some sort of cap on the rate that could be paid on the certificates has been debated within the administration and at the Fed for some time. A review of the status of the economy begun a week ago by administration economists probably convinced them that the action was needed now, particularly in view of recent alarming price statistics.
The thrift institutions, which provide most of the nation's home mortgages, were increasingly disenchanted with the certificates. The rates had gone so high, many of them were reluctant to use money from the certificates for home mortgage loans and instead were reinvesting it in certificates of deposit at commercial banks, which paid an even higher rate.
A spokesman for the U.S. League of Savings and Loan Associations said yesterday that his group's members welcomed the mandatory end to compounding but were less enthusiastic about losing the one-quarter point advantage over commercial banks.
The high rates on the certificates were squeezing profits at the thrift institutions, partly because a large share of the money going into the certificates was coming from deposits already on their books but earning lower interest rates, such as regular passbook accounts that pay only 5 1/4 percent.
"This switching was a very destructive and ominous development," the spokesman said.
The Federal Reserve, with the backing of the administration, pushed hard for the change. The other agencies involved were the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Federal Home Loan Bank Board.