The Federal Reserve Board yesterday raised its discount rate back to the record levels of last spring, making further increases in the prime interest rate a near certainty.
The basic discount rate was raised from 12 percent to 13 percent while the surcharge for large and frequent borrowers was boosted from two percentage points to three percentage points. Financial institutions subject to the surcharge now face a 16 percent rate when they borrow at the discount window.
The prime interest rate already stands at 18 1/2 percent, only 1 1/2 percent below the record set last April. Although the Fed last increased the discount rate only three weeks ago, the prime has jumped three percentage points since then.
Continued high inflation and the Fed's attempts to control the money supply have been blamed for the rapid spiral in interest rates in the last few weeks. A spate of speeches by Fed governors this week have stressed that the central bank will go on with its tight money policy even if this threatens economic growth next year.
Many economists now fear that soaring interest rates will choke off the current economic recovery. There is already some evidence that the housing and auto markets, which were most affected by the spring recession, are being hit again by the high cost of money. The return to record interest rates levels has taken analysts by surprise, and most market men are still predicting that rates will drop again soon. But they may only do so in the wake of a renewed downturn in economic activity.
The Fed voted 6 to 1 for the latest increase in the discount rate, to take effect today, with Governor Nancy Teeteers dissenting.
There have been exceptionally heavey bank borrowings from the discount window recently as banks have taken advantage of the cheaper rates available there than in the interbank market. However some banks are now being forced to pay the surcharge on their discount borrowing, a Fed spokesman said yesterday. He declined to comment on how many banks are in this position.
The Fed said in a statement that the rate rise was "consistent with existing policy to restrain money and credit" and was taken "in the light of the current level of interest rates."
Meanwhile, Federal Reserve Board Vice Chairman Federick Schultz said he expected 1981 to be "a very difficult year." However he predicted less volatile interest rates than there have been this year. He pledged that the Fed would "do what it takes to control inflation." Fed Chairman Paul Volcker, speaking on Wednesday, had stressed that the Fed will keep money tight even if this threatens economic growth next year. Schultz criticized the credit controls imposed by the Fed last spring, saying that these "really messed us up." He told the annual meeting of the American Gas Association in Florida, "I hope I never see those monsters again," adding that "all they can do is make things worse over time." This suggests that the Fed will not resort again to controls but will rely just on interest rates to curb credit demand.
A separate report from the Commerce Department showed that new factory orders rose by 1.7 percent in October after a 5.8 percent leap in the previous month.
Nondefense capital goods orders dropped by 2.8 percent in October the department reported, compared with a rise of 9.8 percent in September.
New orders for nondurables went up by 1.7 percent in the month to an adjusted $77.63 billion, compared with a rise of 1.8 percent in September. Factory inventories contracted by 0.1 percent in October after a very slight rise in the previous month.
Double-digit inflation, which is underpinning the high rates, "is almost inevitable in the near future," the Council on Wage and Price Stability warned yesterday.