Speculation is mounting in financial markets that the Federal Reserve has decided to ease its monetary stance very slightly and allow interest rates to decline gently after the rate increases of recent months.
The Federal Reserve Open Market Committee, which determines policy, had its regular meeting this week, and traders have been watching eagerly for signs of any policy change. Opinions in the market are divided about whether the Fed did decide to ease, or whether it merely decided to hold credit policy unchanged. But a number of traders believe that the central bank may now be ready to allow a very gradual decline in interest rates, provided that the money supply figures are satisfactory in coming weeks.
Wednesday, the key federal funds rate--charged on reserves financial institutions lend each other--slipped back to 9 1/8 percent and the Fed did not move to tighten credit, fueling speculation that it was ready to let rates fall. Yesterday, however, the Fed carried out an unexpected maneuver that pushed the fed funds rate back up to 9 1/4 percent.
That "throws the whole issue back up in the air again," said Elliott Platt of Donaldson Lufkin Jenrette. He added that the Fed's move yesterday could mean that while the central bank is happy to see rates decline, it does not want a swift fall. Another New York financier commented that "rates had moved from 9 5/8 percent to 9 1/8 percent in a few days and threatened to hit 9 percent, so the Fed might just have wanted to say, not that fast."
In May, the FOMC decided on a mild tightening of credit conditions in light of rapid growth in the money supply and signs that the economic recovery was vigorous.
After that, interest rates climbed gradually but persistently until the key federal funds rate reached close to 10 percent and banks across the nation pushed up the prime lending rate from 10 1/2 percent to 11 percent.
However, the Fed has reported much better money supply figures in the past two weeks, which has led some financiers to believe that the central bank may be willing to reverse some of its recent tightening.
The shaky position of world markets and the Third World debt crisis provide additional incentive for policy makers to reduce rates, or at least resist an increase, one analyst pointed out.