The Federal Reserve Board reintroduced a surcharge on its discount rate to the nation's banks yesterday while raising the basic rate a full percentage point to 12 percent.
With the new surcharge, large banks borrowing frequently at the discount window face a rate of 14 percent.
At the same time, the Fed announced a 1.6 percent jump in the nation's industrial production in October. That was the third monthly rise in succession and the biggest increase for more than two years.
The Fed put a surcharge on its discount rate for large and frequent borrowers at the time of the emergency credit controls in March. The surcharge then was 3 percent, while the basic rate stood at a high of 13 percent.
The latest discount-rate jump was in recognition of the high interest rates now being charged on the short-term money markets and recent rapid growth in the money supply, the Fed said in a statement yesterday. The move pushed the dollar higher on New York and foreign exchange markets.
Large borrowings from the Fed's discount window have increased as banks have taken advantage of the cheap discount rate compared to a federal funds rate for interbank loans of about 15 percent.In the week ended last Friday, total bank borrowings at the discount window averaged more than $2 billion a day. This was almost twice as much as a month earlier. m
Although the discount rate follows, rather than leads, the market, the last rise in the rate triggered a further round of prime-rate increases by the major banks. The prime now stands at 15 1/2 percent after a postelection rise last week. The one-point rise in the basic discount rate was not a surprise. Analysts have considered the rate artificially low for some weeks, while other rates have soared. However, the surcharge was not expected.
One of the first problems facing the incoming administration will be the exceptionally sharp and early rise in interest rates. Some economists now believe this country could choke off recovery in the economy.
"The news in the economy is beginning to suggest a reversal in the momentum of the summer and early-autumn economic rebound," according to Allen Sinai of Data Resources Inc. The housing and auto industries, which were hardest hit during the recession and recently have picked up, are vulnerable to new interest-rate hikes.
Industrial production rose by 4 percent in July, the Fed said yesterday. But production in the nation's factories and mines was still 4.4 percent below the level of September 1979.
"We are looking for slower growth in the months to come," David Ernst of Evans Economics said yesterday.
"The economy is weakening again, and there won't be much additional improvement in industrial production," said Lawrence Chimerine, head of Chase Econometrics Associates.
Interest rates have climbed because of high demand for loans and fears among some money market men that inflation will continue to be high next year.
In August, September and October M4-A, the narrow measure of the money supply, grew at an annual rate of 14.6 percent. In the same period, the broader M1-B went up at a rate of 17 percent. The year-to-year figures are much lower, at 5.6 percent for M1-A and 7.4 percent for M1-B. But that is because of sharp falls in the money stock earlier this year which the Fed did not intend to make good in the second part of the year.
Meanwhile the Fed said that it would charge the high discount rate on loans to institutions with deposits of $500 million or more. The surcharge will apply when discount borrowing occurs in two or more successive weeks in a calendar quarter, or more than four times in a quarter.