Fed May Increase Discount Rate Soon In Attempt to Slow Vigorous Economy
NEW YORK -- Fresh evidence of the economy's vigor, especially last month's surge in employment, increases the likelihood that the Federal Reserve System will hit its credit brakes soon, bankers and economists say.</br></br>Unless the Fed acts quickly to slow the economy, inflationary pressures will reappear by year-end, these analysts contend. Some even say the Fed will raise its discount rate this month to at least 9 1/2% to try to head off the inflation threat. The discount rate, which is the rate the Fed charges on loans to banks and savings institutions, has been 9% since early April.</br></br>Even if the Fed decides against any immediate credit-tightening moves, interest rates will rise in coming months, many analysts warn. They say the economy's strong momentum will generate heavy borrowing by businesses and individuals at a time when the federal government's financing needs also will be weighing heavily on the credit markets.</br></br>"Interest rates will work higher over the balance of this year, with further increases in 1985," predicts Lacy H. Hunt, executive vice president and chief economist at Carroll, McEntee & McGinley Inc. He says the economy is displaying "boom-like conditions" that will spark renewed inflation and send bond yields to record levels next year. "Time is running out for the Fed," he argues, adding that he believes the Fed's credit policy has been too lax.</br></br>The Fed's policy-making arm, known as the Federal Open Market Committee, is scheduled to meet next Monday and Tuesday to review policy and set preliminary targets for money-supply growth next year. Some experts contend that the Fed may tighten credit even before that meeting.