Short-term interest rates rose sharply today as the nation's central bank continued to signal that it is adopting a tighter monetary policy.
Analysts said it was not clear how much higher interest rates will rise, but they expect that the Federal Reserve's tighter monetary policy, as well as renewed fears of inflation, could continue to push interest rates higher for several more weeks at least.
Interest rates on such key short-term securities as 90-day certificates of deposit issued by big banks climbed as much as a full percentage point (or 100 basis points), according to Gerard J. Colaluca, assistant treasurer of the Bank of New York. He said the rate on 90-day certificates closed at 15 3/4 percent.
Rates on longer-term securities, such as the 12 3/4 percent Treasury bonds maturing in 2010, rose by between 25 and 30 basis points.
Colaluca said most of the rise in the last two days can be attributed to the Fed's willingness to allow the federal funds rate to rise. This rate is the interest banks charges each other for overnight loans of excess reserves and is a rate that the Fed can control with some accuracy if it so wishes.
A week and a half ago the federal funds rate traded in the 13 percent range. By last Friday it closed at about 15 1/2 percent (and at one point during the day hit 17 percent). Today the rate on federal funds closed at 15 3/4 percent.
The central bank, which permitted the decline in federal funds rate during the last few weeks of March, did nothing either Friday or today to halt the rise in rates. If it wanted to, the Fed could slow the increase in the cost of federal funds by purchasing government securities on the open market. Such an action adds reserves to banks that they then can lend, easing the pressure on financial institutions to bid for funds in the open market.
Because of the continuing increase in the cost of overnight money, several major banks today boosted the rate they charge brokerage firms that borrow overnight from financial institutions. At some banks the broker loan rate had fallen as low as 15 1/2 percent. Today First National of Chicago and Chemical Bank boosted their broker loan rates from 16 to 16 1/2 percent.
The prime lending rate, on which banks base most of their loans to businesses, remains at 17 percent at most major banks. The prime rate has fallen more slowly than interest rates in the open market -- in part because banks are trying to recover some profits they lost when market interest rates soared in November and December, and they could not raise their lending rates fast enough.
Rates have been rising not only because the Federal Reserve has failed to take steps to counteract the upswing. Investors have become anxious again about inflation, in large part because of a faster-than-expected 1.3 percent climb in wholesale prices in March, and because the Federal Reserve itself, in a monthly report issued last week, showed that a 13 percent federal funds rate was lower than it wanted.
Many investors and other market participants assumed that when the federal funds rate fell to 13 percent, it did so with the blessing of the central bank. But minutes of the Federal Reserve's Open Market Committee meetings in February, which were released Friday, showed that the central bankers wanted to keep the federal funds rate within a range of 15 percent to 20 percent. The Open Market Committee, the arm of the Fed that is most critical in setting monetary policy, met last Tuesday, but the minutes of that meeting will not be available for a month.
Analysts also expect that the money supply -- basically currency and checking accounts available for consumers and businesses to spend -- will grow sharply in April.