Short-Term Rates Rise and Bond Prices Slump Despite Decline in Money Supply
NEW YORK -- Most short-term interest rates climbed yesterday, adding to uncertainty about the Federal Reserve System's credit policy and sending a chill through the bond market.</br></br>Even an unexpected decline of $300 million in the nation's money supply, reported by the Fed yesterday afternoon, did little to rejuvenate the credit markets. Bond prices slumped about 1/2 point, or around $5 for each $1,000 face amount. That was the third decline in a row, bringing the total drop to nearly two points.</br></br>Many analysts are expecting huge increases in the money supply over the next few weeks, partly because of federal income-tax refunds and partly because they expect faster economic growth. Bond traders fear that rapid money growth would intensify investor fears about the inflation outlook and would make the Federal Reserve much less willing to ease credit conditions.</br></br>Other Fed figures released yesterday contributed to confusion about Fed policy and the interest-rate outlook. "People were looking for clear evidence that the Fed had made a decisive move toward an easier policy, but the data didn't provide that," said Rudolf Thunberg of Ried, Thunberg & Co., a New Canaan, Conn.-based investment research firm. "The reserve data suggests that any move the Fed has made is a modest step indeed."</br></br>The federal funds rate, the rate on overnight loans of reserves between banks, ranged between 8.125% and 8.25% most of yesterday. That was up from an average of 7.69% in the week ended Wednesday, which was the lowest weekly average since mid-1978. Bond traders monitor the funds rate closely because it strongly influences many other interest rates, including those that dealers themselves pay to finance their securities holdings.