The Federal Reserve Board yesterday raised the interest rate at which it lends money to member banks, a step it usually takes when it wants to tighten credit and slow down economic growth.
But the cenral bank, which regulates the supply of credit in the economy, took unusual pains to say that this time that was not its purpose.
The bank said the increase in the so-called discount rate from 5.25 per cent to 5.75 per cent was purely a "technical step, that it was simply trying to catch up with other credit-tightening actions it has already taken in recent weeks.
While nearly all economists agree that the impact of a change in the discount rate is small - the Federal Reserve influence money and credit through its buying and selling of government securities in the open market - it has a strong psychological effect.
When the Fed raises the discount rate, for example, it is generally interpreted as a signal that the central bank thinks the economy is expanding too much; if it cuts the rate - as it did last November - it is seen as an indication the Fed thinks the economy needs a boost.
In fact, through its buying and selling of government securities in recent weeks, the central bank has been raising interest rates to hold down what it sees as the excessive growth of the money supply. The money supply checking accounts and currency in circulation, has been growing much faster than the Federal Reserve wants it to.
What the Fed said yesterday was tha while it is fighting money supply growth with one hand, the public should not interpret its other actions as also being aimed at slowing the growth of the money supply. Nearly all economists agree that money supply growth must be regulated so that neither inflation nor recession result.
Federal Reserve Board governor Henry Wallich cast the only vote against yesterday's discount rate rise. Fed sources said Wallich disapproved of the move because he felt it would be misinterpreted as an action by the Fed to restrain economic expansion by boosting interest rates.
Four governors approved the move, with Board of Governors Chairman Arthur F. Burns and governor Philip E. Coldwell on vacation and not voting.
Burns, however, conferred with the board by telephone and a spokesman said he supported the action.
Richard Peterson, chief economist for Continental Illinois Bank and Trust Co. of Chicago, said the discount rate rise was a confirmation of steps the Fed has been taking recently to hold down the growth of bank reserves. Since banks use these reserves to make loans, holding down the reserves has resulted in boosting short-term interest rates by about three-quarters of one percentage point.
When interest rate rise, borrowing is supposed to become less attractive, which in turn holds down excess expansion of the economy and slows inflation.
But the Fed, anticipating that the public would judge the discount rate rise as an anti-inflation step, said it did so only for the "purpose of bringing the discount rate intobetter alignment with other short-term interest rates."
It noted that banks can come to the discount window at the Fed, borrow money cheaply and lend it out at the higher rates being charged in the free market.
Banks seem to have been doing just that. In the week that ended Aug. 24, member banks borrowed an averaged of $1.7 billion from the central bank. Four weeks earlier, before the Fed boosted short-term interest rates, member bank borrowings averaged $295 million.
The Aug. 24 level of bank borrowing is the highest since late 1974, when the entire banking system was short of funds and Franklin National Bank was borrowing from the Fed heavily trying to avert its eventual failure.
The board of governors said yesterday the discount rate rise was not aimed at curbing credit expansion, but at reducing the incentive for member banks to borrow. The Fed sees its discount window as an emergency source of reserves with which banks can make loans.
Peterson of Continental Illinois, said that yesterday's move by the Federal Reserve had been expected an that it will have no further effect on the interest banks such as the prime rate banks charge their best corporate customers or on long-term interest rates such a mortgage charges.
But all the Fed's actions will make the cost of borrowing more expensive and should keep the money supply from growing too fast over the next few months, which should temper price rises in 1978 and 1979.
Technically the Federal Reserve yesterday approved requests from seven of its 12 district banks to raise their discount rates. The remaining five banks can be expected to raise their rates within the next few days.