Bond prices declined today, after increasing in early trading, when jittery investors became convinced that the Federal Reserve had taken steps that ensure interest rates will go higher.
Bond prices, which are sensitive to interest rate movements, lost about $7.50 off a face value of $1,000, according to Bernard Harmon, first vice president of Drexel Burnham Lambert Inc. He cautioned, however, that bond trading was light "and very erratic."
Investors are nervously awaiting a number of reports, including a Federal Reserve statement on the growth of the money supply during the week ended Aug. 13 and a Labor Department report on consumer prices during July. Economists anticipate that July consumer price increases may be the lowest in three years, and think that the report of the economy's money supply will show a decline.
Last week the money supply exploded, growing by more than $8 billion, and money traders think the latest report will show that much of that growth was a fluke, caused by factors such as an early payout of Social Security benefits in August.
In any event, money has been growing much faster than the target range set by the Federal Reserve for the last several months.
Although economists differ in how much stress they place on the role of money in economic behavior, nearly all agree that excessive growth triggers inflation and too little growth will cause recession.
Investors, traders and analysts thinkthat the central bank will adopt a tougher monetary stance in order to reduce monetary growth. Federa Reserve Chairman Paul A. Volcker and Vice Chairman Frederick P. Schultz have said as much publicly, arguing that unless the Fed keeps a tight control over money (essentially defined as cash and checking accounts, sometimes including savings deposits), there will be no lasting benefits in the fight against inflation.
Wall Street investors and traders think that a tougher Fed approach will result in higher interest rates.
Rates have been moving steadily upward since early July -- although they remain far below their peaks of last April -- and jumped sharply late last Friday and early this week after the money supply report.
Today the Federal Reserve allowed the so-called federal funds rate to rise to 10 percent before it supplied reserves to the banking system, as action traders took as a signal the Fed wantedinterest rates to rise further. The federal funds rate, the interest banks charge each other for overnight loans of excess reserves, is the key short-term interest rate and one which the Fed can control closely. The Fed supplies funds that banks can lend by purchasing government securities, and drains bank reserves by selling securities.
"Today's action shook the market," according to Leon Gould, an economist with Commercial Credit Corp. But, he said, "it was not a clear-cut signal of the Fed's intentions" because the central bank said it was operating on behalf of a customer (such as a foreign central bank) and not for its own account.
In response to recent increases in so-called market interest rates, other interest rates have risen as well. Chase Manhattan Bank boosted its prime lending rate to corporations from 11 percent to 11 1/4 percent this week and other banks are expected to follow. The biggest mortgage lender in the country, Home Savings and Loan in Los Angeles, raised its rates for home loans from 13 to 13 1/2 percent.