With Federal Reserve Board Chairman G. William Miller casting the deciding vote last Friday, the nation's central bank has moved to raise the cost of borrowing money slightly.
Informed sources said today the board apparently was concerned the world financial markets would be upset if the Fed took no action after a sharp increase in the money supply, announced last Thursday.
William Sullivan, vice president of the Bank of New York, said the Fed's actions last Friday and today indicate that the central bank has raised its key interest rate target from 10 percent to 10 1/4 percent.
Sources said the Fed's policy-making Open Market Committee held a special telephone meeting last Friday and decided to increase the interest rate on so-called federal funds (monies banks lend each other overnight by a quarter point.
Miller, after weeks of resisting pressure from some Carter administration officials that the Fed should increase interest rates, cast the deciding vote last Friday to do just that, the sources added.
The Federal Reserve's Open Market Committee was closely divided on the question during the telephone meeting, and Miller, as chairman of the 10 member FOMC, cast the final and decisive vote.
Only 10 days earlier, the FOMC had gathered in Washington for its regular monthly meeting and chosen, with a number of dissents, to leave policy unchanged.
In the interim, it was reported that the nation's money supply-M1, the total of currency in circulation and checking account deposits at commercial banks-jumped by $4.1 billion in the week ended April 18.
Fed sources said the agency does not believe the $4.1 billion jump is cause for alarm. One source noted that the 10 1/4 percent target is well within the limits set by the open market committee at its March meeting, when the group voted to keep the federal funds rate within a range of 9 3/4 to 10 1/2 percent.
However, sources explained, the Fed took its actions last Friday and today to counter any expectations in U.S. and foreign financial circles that the central bank would tolerate a surge in money growth without acting.
The action, which sources say is more cosmetic than real, apparently was designed to prevent any speculation against the U.S. dollar.
Although economists differ on how important the money supply is to inflation and economic growth, nearly all agree that if the money supply grows too fast, inflation gets worse.
The Fed raises interest rates to slow money growth by making it more expensive for businesses and individuals to borrow.
Several New York bankers today criticized Miller for "flip-flopping" on interest rate policy.
Despite the surge in the basic money supply in the week ended April 18-as well as a similar surge in a broader measure that counts cash, checking accounts and savings deposits at banks-sources said the Federal Reserve does not think the money supply is growing out of control.
For the last several years, the money supply has behaved erratically in the spring, and financial techniques being used by corporate treasurers in recent years have have made it harder than usual for the Federal Reserve to count the money supply.