The Federal Reserve Board appears to have put the brakes temporarily on the recent precipitous slide in interest rates, analysts said yesterday as some open-market rates moved up slightly.
But experts predicted that the interest rate decline, which has triggered strong rallies in the stock and bond markets during the past two weeks, will resume later this year.
"For the time being, at least, the good news in terms of declines is over," said David Jones, an economist at Aubrey G. Lanston & Co. Inc. in New York. "The indications are that monetary authorities have stopped easing credit," he added.
Henry Kaufman, the widely watched Salomon Brothers economist whose prediction of lower interest rates helped trigger last week's stock-market buying spree, said yesterday that, although short- and long-term rates should continue to fall over the next year, he foresees occasional temporary interest rate increases.
The analysts downplayed the Fed's reduction in the discount rate Thursday to 10 percent from 10 1/2 percent, saying the action appeared to be an attempt to catch up to declines in other rates rather than an attempt to lead rates down further.
"If the Fed meant to lead with this latest discount rate reduction, they probably would have dropped it a full percentage point instead of just a half," Jones said.
The Fed has reduced the discount rate--charged on loans made by the Fed to large banks--a total of two percentage points in the past six weeks.
Banks did not follow the reduction in the discount rate with a round of reductions in the prime rate, as they have done after the three other recent discount rate cuts. Analysts said that lent credence to the theory that the latest cut was a "catch-up" action.
They said banks also were dissuaded from making further cuts in the prime by indications that the Fed's Open Market Committee (FOMC) apparently had decided in its meeting Tuesday to push open-market interest rates higher by limiting the amount of money in the banking system.
The federal funds rate, the interest charged on overnight loans between large banks, rose yesterday to as much as 10 1/2 percent before closing a little over 10 percent, after trading below 9 percent last week. Analysts saw that as an indication that the Fed was taking action in the open market to buoy rates.
The Fed disclosed yesterday that the FOMC had agreed in its July meetings to keep the federal funds rate in a range of 10 to 15 percent from June to September.
But the FOMC also decided to let the nation's basic money supply grow a little bit more rapidly during the period, which probably helped keep rates down. The Fed raised its money-supply growth target to 5 percent in the June-September period from 3 percent in March-June.
In its report on the latest money supply figures yesterday, the Fed said that the basic money supply, Ml, rose to a seasonally adjusted average of $454.9 billion in the week which ended Aug. 18 from $453.5 billion the previous week. Ml is comprised of cash, checking and NOW (negotiable order of withdrawal) accounts.
The other data released with the money supply figures showed the extent of the recent drop in interest rates. The federal funds rate fell to an average 9.04 percent in the week which ended Aug. 18 from 10.11 percent the week before, while the rate on three-month Treasury bills was down to 7.43 percent from 8.68 percent.
The $1.4 billion gain in the money supply--about what had been expected by economists--put M1 growth at the upper limits of the Fed's growth targets.
In the FOMC meeting, the Fed said, the committee "agreed that growth in the monetary and credit aggregates around the top of the indicated ranges would be acceptable . . . Somewhat more rapid growth would be acceptable, depending on evidence that economic and financial uncertainties are leading to exceptional liquidity demands and changes in financial asset holdings."
Economists said the Fed would back up that philosophy by keeping a light rein on interest rates, but tightening credit slightly when it appeared that rates were falling too quickly.
Two New York banks--Manufacturers Hanover Trust Co. and Citibank--lowered some of their mortgage interest rates slightly yesterday.