Just when administration officials seemed to have given up hopes of lower interest rates before the elections, the markets moved.

In the last month, some short-term interest rates have plunged by as much as 5 percent. The key prime lending rate at major banks is now lower than at any time since President Reagan took office, and is widely expected to drop still further. The Federal Reserve is likely to lower its discount rate a further notch from the 10.5 percent level set on Friday, most analysts believe.

This break in interest rates probably has come too late to boost the economy much before November, analysts say. But it can only be good news for the White House and for Republicans up for election this fall.

Why has it happened?

Some New York analysts have attributed the decline in rates to a shift in Federal Reserve monetary policy. Since about the middle of July, the Fed has moved aggressively to supply reserves to the banking system and to ease credit conditions, they say. Three declines in swift succession in the Fed's discount rate, which is the interest charged to large banks borrowing from the discount window, have set the seal on the general slide in the cost of short-term money, they argue.

It is certainly true that the effect of Federal Reserve actions on the markets in the last few weeks has been to encourage lower rates. But many Fed watchers believe that the central bank has continued to set its policy according to its monetary targets, and simply has been able to lower rates in response to slower money growth. This slower growth, in turn, reflects the prolonged weakness in the economy, which has led most forecasters to revise downward their expectations for growth in the second half of this year.

According to one administration official, it is just good luck that money numbers in recent weeks have allowed an easier Fed posture. If the numbers had continued to show higher than target growth -- as they did for the first half of this year -- the Fed would have been forced to keep its tight grip on credit markets, he said.

"The market itself is bringing rates down," according to one New York economist. "For a long time, the Fed has been happy to follow rates down, but unwilling to lead them," he added.

It has become increasingly clear, however, that Fed Chairman Paul Volcker distrusted the signals that the money supply numbers were giving until the middle of the year. Above-target growth reflected technical changes in the relationship between the money supply and economic activity rather than reflecting a stronger economy, Fed economists began to believe. Attempts to rein in the money supply to meet targets set on the basis of previous relationships thus would result in a tighter-than-intended policy.

Volcker told Congress last month that, on the basis of this analysis, the Fed was aiming at the upper part of its target range of 2 1/2 percent to 5 1/2 percent growth this year in the measure of the money supply known as M1, and would be willing to tolerate growth outside this range "for a time." Since then, the money supply numbers have been weaker than expected, with M1 -- which includes currency and all checking accounts -- staying within the Fed's target range.

One view is that this has given the Fed room to ease credit conditions without threatening its longer-term targets. The swiftness with which it has moved to cut the discount rate, however, illustrates its concern about the economy, several analysts say.

This concern has two aspects. First, there are not yet signs of the expected recovery in the economy. Unemployment rose sharply again last month, consumers apparently have not yet begun to step up spending in the wake of the July cut in individual income taxes, and business is cutting capital spending.

But secondly, there have been ominous signs of weakness in the financial system. After the collapse of Drysdale Securities and Penn Square National Bank last month, another government securities firm, Lombard Wall, failed last week.

The drop in interest rates is welcome. But it reflects economic and financial weakness rather than being the "encouraging sign of the economic recovery" that the White House called it yesterday.