The Federal Reserve Board yesterday underscored the recent drop in interest rates by lowering from 13 percent to 12 percent its charge when financial institutions borrow directly from the central bank.
The board's move could pave the way for further declines in market interest rates as the economy continues to weaken.
Treasury Secretary Donald T. Regan told a meeting of security analysts in Florida that interest rates "are coming down and they have a lot more room to go." Regan would not predict how much more rates will drop but said both short-term and long-term rates will be "a lot lower than they are currently."
At a press conference, Regan said he has "noted with approval what the Fed is doing," though he acknowledged that earlier this year the administration was "a little unhappy with the Fed." Specifically, he said that if the central bank sticks with the targets it has set for money growth in 1982, "We'll be satisfied."
Meanwhile, the Commerce Department provided more evidence yesterday that the recession will not end immediately when it reported that new orders for durable goods plunged 9.1 percent in October, the sharpest drop in nearly seven years. At the same time, with sales dropping faster than production, backlogs of unsold goods kept growing, implying further cuts in output and employment in the future.
New orders for all manufactured goods declined $8.8 billion, or 5.2 percent, in October, equal to the drop in April 1980 during the last recession and topped only by a decline in April 1979, when a nationwide trucking strike halted many orders.
After the Federal Reserve made the announcement of the discount rate cut, prices of long-term bonds, which had been rising most of the afternoon in anticipation of the Federal Reserve's move, surged upward. The Fed said its action "was taken to bring the discount rate into better alignment with short-term rates that have been prevailing recently in the market."
Treasury bond prices rose about $10 for each $1,000 in face value within minutes. For the day, the key Treasury bond that matures in 2011 rose nearly $30. Corporate bonds were up about $10 on the day, while municipal securities did not rise much at all.
Bonds are long-term debt securities whose interest is fixed for the term of the loan. As a result, bond prices rise when interest rates fall. During the past five weeks, federal and corporate bond prices have rallied strongly, although the hard-pressed municipal bond market has not fared as well. However, some of the steam had gone out of the bond market rally earlier this week, although prices remain between 15 percent and 20 percent higher than they were in September.
Financial market analysts have been expecting a discount-rate drop for some time since the Fed's operational techniques of influencing money markets normally involve having the discount rate lower than the federal funds rate--the interest rate that banks charge one another for overnight loans of reserves on deposit at the Fed. The federal funds rate has been fluctuating in the vicinity of 13 percent recently.
Norman Robertson, chief economist at Mellon Bank in Pittsburgh, told a news conference he believes economic activity will shrink at an annual rate of about 5 percent in the current business quarter and drop at a 4 percent pace in next year's first quarter. He also predicted that interest rates will fall farther early next year, with mortgage rates reaching as low as 14 percent.
In another development yesterday, the Labor Department reported that initial claims for regular state unemployment benefits were a seasonally adjusted 512,000 in the week ended Nov. 21. The level of new claims was down somewhat from that of the previous six weeks but is still high enough to indicate that layoffs are continuing across the country.
The department will release its report on employment and unemployment for November this morning. The unemployment rate jumped from 7 1/2 percent in September to 8 percent in October. In a month following such an unusually large increase, the lack of a further rise or perhaps only a small increase in November would not indicate the recession had reached bottom.