Savers are cheering - and borrowers booing - after the Federal Reserve Tuesday pushed through its largest interest rate increase since 1981. The goal in raising two key short-term interest rates to their highest levels in three years: control inflation. The increase - the Fed's sixth this year - will help "foster sustainable economic growth," the central bank says. The Fed raised the: -- Federal funds rate, what banks charge each other for overnight loans, three-quarter percentage points, to 5.5%. -- Discount rate - what it charges banks for overnight loans - to 4.75% from 4%. Banks immediately responded. Chase Manhattan and First Chicago raised prime lending rates to 8.5% from 7.75%. And others are expected to follow. In the short-term: -- Savers are winners. They will earn more on money market and deposit funds as those rates also rise. -- Borrowers are losers. Expect credit card, home equity loan and adjustable mortgage rates to increase. Business loan rates will rise, too. One bright spot: If bond investors are convinced the move will keep inflation in check, 30-year fixed mortgage rates may not rise further. The average rate, pegged to long-term bond yields, has risen more than 2 percentage points this year, to 9.2%. So far, though, investors are undecided. Stock and bond prices seesawed after the central bank's announcement. Not everyone agrees the Fed did the right thing. The AFL-CIO, farm and consumer groups - with signs demanding "Jobs. Not Rate Hikes" - marched outside Fed headquarters. And Martin Regalia, chief economist at the U.S. Chamber of Commerce, says the Fed "took another big step toward cutting the legs out from under the economy." But a USA TODAY/CNBC fax survey shows 24 of 26 economists applauding the move. The rate increases "will help slow the economy and prevent inflation from escalating," says M. Kathryn Eickhoff, president of Eickhoff Economics. Treasury Secretary Lloyd Bentsen says only that the Clinton administration shares the Fed's goals: steady growth with low inflation.
Rates rise The Federal Reserve pushed up short-term interest rates for the sixth time this year.
