Bond Slump Continues Amid Concern Fed May Be Tightening Credit Grip More
NEW YORK -- The bond market's recent slump deepened yesterday amid continued nervousness among dealers and investors that the Federal Reserve System may be tightening its credit clamp further.</br></br>Jitters about Fed policy intensified yesterday because of an increase in the closely watched interest rate on federal funds, which are reserves that banks lend one another overnight. But many analysts argued that the rise was due to special factors and didn't reflect any change in the Fed's monetary strategy.</br></br>The funds rate, which economists use as one guide to analyzing Fed policy, surged to 10 3/4% at one point yesterday afternoon from Friday's average of 10.24%. Prices of some actively traded U.S. government bonds fell about one-half point, or about $5 for each $1,000 face amount. Interest-rate worries spilled over into the stock market. The Dow Jones Industrial Average fell 11.73 points to close at 1153.16. And the U.S. dollar rose in foreign-exchange trading.</br></br>The Federal Reserve won't comment on current policy. But several Fed officials recently have expressed concern that the economy's vigorous growth, if left unchecked, will rekindle inflation later this year. Many analysts contend that the Fed tightened credit conditions last month in an attempt to slow the economic expansion, and some expect further credit-tightening moves in coming weeks.</br></br>Rumors that the Fed may boost its discount rate have swept through the credit markets in recent weeks. The discount rate, which is the fee the Fed charges on loans to banks and savings institutions, has stood at 8 1/2% since December 1982. Some economists predict the Fed will raise the rate to 9%, or possibly 9 1/2%, to underscore its determination to keep inflation under control.