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CNN Time Capsule 1994
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0420022a.txt
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1995-01-30
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BY Beth Belton; Bill Montague
The Federal Reserve increased short-term interest rates a half percentage point Tuesday to their highest levels since November 1991.
That decision in turn prompted most commercial banks to raise their prime lending rates - to which most consumer loans are pegged.
Chase Manhattan Bank and Norwest Corp. increased their prime from 7.25% to 7.75% - highest in three years.
Stock and bond prices also soared in reaction; the Dow Jones industrial average jumped 24.28 points to 3784.57.
The Fed said it would raise the discount rate, what it charges banks for overnight loans, to 4% from 3.5%.
It also set a new target of 4.75%, up from 4.25%, for the federal funds rate - what banks charge each other for overnight loans.
"The actions are intended to keep inflationary pressures contained, and thereby foster sustainable economic growth," a Fed statement said.
"A big thumbs up," says David Jones, economist at Aubrey Lanston & Co. in New York.
Savers will earn more on short-term investments. But borrowers will suffer since higher rates means their interest payments will rise.
Bond investors were ecstatic at the Fed's inflation-fighting move. Inflation erodes the value of bonds' fixed payments.
The yield on the 30-year Treasury bond, which moves opposite to its price, fell to 7.36% from 7.5% Monday.
To check inflation, the Fed has pushed rates 1.75 percentage points higher in five moves this year. The last was May 17.