he Federal Reserve Board took new steps today to make credit in the nation cheaper and easier to come by as the economy appears to be slipping deeper into a recession.
Analysts said the Fed move--an injection of funds into the banking system that banks can then use to make loans--foreshadows more declines in the prime lending rate and probably in the Fed's own discount rate, which is the interest the central bank charges member banks who borrow from it.
The Fed has been allowing credit conditions to ease gradually for the past few months. The key federal funds rate--the interest banks charge each other for overnight loans of excess reserves and an interest rate the central bank can control--has slipped about six percentage points since last summer. The prime lending rate has fallen four percentage points.
Still, most major banks charge their best corporate customers about 16 1/2 percent for a short-term loan, by historical standards an exceptionally high rate.
If loans are easier to get and interest rates decline, consumers will be encouraged to buy items such as cars, appliances and homes. Companies will see some of the burden of high interest rates removed from the cost of doing business and may become more willing to borrow to finance construction of new plants and equipment.
Bond prices surged today in response to the Federal Reserve action. Bond prices rose about $20 for each $1,000 in face value, according to William Sullivan, vice president of the Bank of New York.
In response to rising bond prices, corporations that had shunned the long-term debt market began trying to sell bonds to the public. Sullivan said bond issues worth more than $1.6 billion were "priced" today, and the new issues were well received.
The Fed's move to ease credit conditions came a day after its Open Market Committee met in Washington to decide the course of monetary policy for the next month.
Sullivan called the Fed's injection of funds into the banking system "an aggressive signal" to the financial community that the central bank is willing to see interest rates continue to fall from their near-record levels.
"We have to go back to October 1980 to find the Fed intervening supply funds to the banking system at this low a Fed funds rate," Sullivan said.
When the Fed added reserves, the federal funds rate was about 12 5/8 percent. The rate climbed back above 13 percent late in the day. But Wednesday is the day when banks must have enough funds in their accounts at the Federal Reserve to meet their legal reserve deposit requirements. The federal fund rate often rises late on Wednesdays as banks with a need to add to their Federal Reserve accounts bid for excess reserves at other banks.
The Federal Reserve never discusses the policy meaning of any of its day-to-day interventions in the money markets. But officials say privately that they are willing to see interest rates come down farther.
The bond market would be the biggest initial beneficiary of lower interest rates. With a few setbacks, bond prices have been rising sharply for three weeks as investors have recognized that the nation has been heading into a serious recession that would contain the rate of inflation and would force the Federal Reserve into easing its inflation-fighting monetary policy to keep the recession from getting worse.