The Federal Reserve Board raised a key interest rate yesterday, but only after an unusual 4-to-3 vote indicating that some members want no further increase in rates in the face of a recession.
The board raised the discount rate, the interest it charges on its loans to commercial banks within the Federal Reserve system, from 10 1/2 percent to a record 11 percent.
Officially, the Fed said the action "was taken against the background of recent increases in other short-term interest rates to bring the discount rate in closer alignment with short-term rates generally and to discourage excessive borrowing by member banks" from the Federal Reserve.
A Fed official, explaining the majority's decision, said, "Without trying to lead the market, it underscores what we have done" in previously pushing rates to high levels to combat inflation. "What we are reacting to is the seriousness of that inflation," he said.
Federal Reserve Go. Charles Partee, who along with governors Nancy Teeters and Emmett Rice voted against the increase, said he had done so "because it is pretty late in the whole cycle of events" to raise rates another notch.
"It's not a certainty, but a high probability that we are moving into a recession," Partee continued, a development that will require the Fed to lower rates at some point to keep the money supply growing.
"I just did not see this final wrench was necessary," he declared.
Meanwhile, in one recessionary sign, the Commerce Department reported that personal income increased only $8.4 billion in August as industrial layoffs trimmed payrolls. Wages and salaries fell $1.7 billion in manufacturing industries, the department said. (Details on Page F1.)
Even Partee called the Fed's vote "a close call." With commercial banks' prime lending rate at 13 percent, rates on short-term borrowing by the U.S. Treasury at 10 1/2 percent and the so-called federal funds rate at 11 3/8 percent, Partee agreed an 11 percent discount rate is "closer to a more-traditional relationship with other rates."
Last No. 1, a full percentage point increase in the discount rate, from 8 1/2 percent to 9 1/2 percent, was used as a strong signal to the rest of the world that the United States was serious about the pledge made that day to defend the value of the dollar on foreign exchange markets.
On that occasion, the increase had the intended effect of pushing up other short-term interest rates. This time, a Federal Reserve official said, there was no such intention.
However, foreign exchange markets were still part of the intended audience. The United States and other governments have been intervening in foreign exchange markets to the tune of billions of dollars in recent weeks in an effort to stabilize the dollar's value.
One destabilizing influence recently has been an increase in interest rates in West Germany, which has made it more attractive to hold Deutsche marks instead of dollars. Raising interest rates here can offset that change, some analysts say.
Rep. Henry Reuss (D-Wis.), chairman of the House Banking Commit- tee, referred to this situation in a statement in which he called the 4-to-3 vote "intriguing." Said Reuss: "For the first time, Fed members are wondering out loud whether it really makes sense to throw men and women out of work, and businesses into bankruptcy, in order to 'rescue the dollar' by chasing ever-rising European interest rates."
Yesterday's action by the Fed came after the monthly meeting of the Federal Open Market Committee, which includes the seven members of the board and five of the regional Federal Reserve bank presidents. The FOMC, the Fed's principal group for setting monetary policy, does not announce its decisions immediately.
Many money market analysts have been expecting the FOMC to seek to tighten credit again in an effort to slow down sharp increases in the money supply.
Perhaps reflecting those expectations, as well as continuing effects of other recent actions by the FOMC, the analysts say the commercial bank prime lending rate could rise to 13 1/4 percent by the end of this week.
However, the split vote, with its clear signal that from the Fed's own point of view interest rates are at or close to their peak for this business cycle, might forestall any more increases in market interest rates.