In a move to tighten monetary policy further, the Federal Reserve Board raised the discount rate a full percentage point to 14 percent today while the nation's major banks boosted their prime lending rate to 19 percent.
In addition, the Fed raised the surcharge for member banks that borrow frequently to four percentage points.
During the last few weeks, the prime lending rate -- the rate to which most major business loans are keyed -- has climbed two percentage points at most banks. Today's rise from 18 percent to 19 percent reflects Federal Reserve efforts last week and the week before to cut down on the amount of funds banks have to lend.
Analysts said the big increase in open market interest rates today could be attributed to investor fears that the Fed would have to take further action to restrain the growth of the money supply (essentially checking accounts and cash that can be spent easily for goods and services) following Friday's report that the money supply exploded by $4.2 billion last week.
William Sullivan, vice president of the Bank of New York, said that nearly every short-term interest rate -- from those paid by banks to raise money -- jumped a full percentage point today. For example, Sullivan said, three-month certificates of deposit issued by big banks carried a 17.85 percent interest rate compared with 16 5/8 percent at 3 p.m. Friday.
Ed Meese, top adviser to President Reagan, told a homebuilders convention in Washington that he thinks interest rates are rising because the financial community still is not convinced that Reagan's program of reduced spending and sharp tax cuts will restore noninflationary growth. Meese said it would take actual passage of the Reagan plan before investors are to be "convinced that something is going to happen" that will reduce interest rates and inflation.
But all indications are that rates will go up higher, in response to the central bank's avowed intention to clamp down on the availability of credit that banks can turn into new money, and that interest rates will swing widely as they have done for the last 18 months.
Last week, during a briefing with reporters in Washington, Federal Reserve Board Chairman Paul A. Volcker said that as the central bank becomes more aggressive about controlling the amount of money in the economy, interest rates will become more volatile. During the last four weeks, for example, interest rates have risen more than they might have climbed in 52 weeks 10 years ago.
In early April, the federal funds rate, which is the interest banks charge each other for overnight loans of excess reserves, was about 15 1/2 percent. Late Friday the federal funds rate was about 19 1/2 percent, although today the rate averaged about 18 1/2 percent.
In announcing an increase in their prime lending rates, the banks cited the rising Cost of funds in the open market, where they raise much of the money they in turn lend to their customers.
The Federal Reserve Board in Washington, announcing a raise in the discount rate from 13 percent to 14 percent, said the central bank took the step both in recognition of other short-term rates and in light of "the need to maintain restraint in the monetary and credit aggregates."
At 14 percent, the discount rate is well below other rates in the open market, but a bank that borrows two weeks in a row from the Federal Reserve would face a four-percentage point penalty and be required to pay 18 percent. Similarly, a bank that borrows four times during any 13-week period would be required to pay the same penalty. The penalty used to be three percentage points.
Observers said the Fed acted today because the Treasury plans to auction $6.75 billion of new securities as part of its regular quarterly funding activities. The Fed usually takes major monetary policy steps before, rather than after, the three-day financing so it cannot be accused of "sand-bagging" investors.