One of the hottest topics on Wall Street these days has been speculation over when the Federal Reserve would raise a key short-term interest rate, known as the discount rate. That's the interest the Fed charges on loans to member banks and savings institutions, and it's considered the most direct vehicle for the central bank to make its credit policies known. Most economists predicted the discount rate would be raised 0.5 percentage point to 7 percent. The Fed already had given numerous indirect signals of its desire to keep credit tight. This past week alone, it stood by while another important interest rate, the federal funds rate, headed sharply higher. The rate on funds, or overnight loans between banks, had gone as high as 9.25 percent on Thursday before closing at 8.87{ percent, up from 8.37{ Wednesday. The rate had been well below 8 percent for most of the summer. Had it wanted to keep interest rates down, or loosen credit, the Fed would have injected more reserves into the open market through the purchase of government securities. But, ``it failed to counteract the uprward pressures that have taken place,'' said William V. Sullivan, director of money market research for Dean Witter Reynolds Inc. ``That was a very clear signal.'' Over the past few months, the Fed has allowed the fed funds rate to move higher to keep inflation in check, driving up the yields on Treasury bills and most other short-term securities. Long-term rates also have risen, including rates on commercial mortgages and home equity loans. Some economists are predicting the bank prime lending rate, which was raised a half percentage point to 10.5 percent in late November, will reach 11 percent by the end of the year. Concerns about inflation, coupled with the dollar's recent weakness in foreign exchange, have been mainly responsible for the rise in interest rates, economists say. Carol A. Stone, a senior economist for Nomura Securities International Inc., said this past week's government report on retail sales especially fueled the inflation fears because it showed brisk economic growth. The report said that November retail sales rose 1.1 percent following an upwardly revised 1.6 percent increase the previous month. ``What we had thought some months ago was that consumer spending was only sluggish ...,'' Stone said. ``It now looks like consumers have been spending at a pretty good rate since the summer and that there's more ... economic activity.'' Other economic reports released this past week showed that nationwide industrial production rose a brisk 0.5 percentage points in November and that factory use climbed 0.2 percentage points to the highest level in nine years. Raising interest rates will amount to throwing cold water on economic growth because it will make borrowing costs for businesses and consumers more expensive.
