Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: WEDNESDAY, August 17, 1994                   TAG: 9408170086
SECTION: NATIONAL/INTERNATIONAL                    PAGE: A-1   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                LENGTH: Medium

FED RAISES RATES BY HALF-POINT

After a closed-door meeting of its policy-setting Federal Open Market Committee, the central bank said it was pushing short-term interest rates a half percentage point higher.

Most major banks, led by Chase Manhattan and Norwest Corp., immediately followed by raising their prime rates to 7.75 percent from 7.25 percent.

Virginia's major banks also raised their prime rates to 7.75 percent.

The higher rate was effective Tuesday at NationsBank, Crestar Bank, First Union National Bank of Virginia and First Virginia Bank. It will take effect today at Central Fidelity and Signet banks.

The monetary tightening action, the fifth this year, brings the Federal Reserve's two benchmark rates - the federal funds rate and the discount rate - to their highest levels since December 1991.

``It's certainly not good news for consumer borrowers,'' said economist Paul Getman of Regional Financial Associates in West Chester, Pa. ``It means home equity loan rates, credit card rates, personal loan rates - anything tied to the prime - will jump very quickly.''

However, he said rates paid on deposits probably wouldn't change appreciably because loan demand at banks remains relatively slack.

The ultimate effect on long-term borrowing rates that are set by financial markets, such as those on 30-year mortgages, was less certain. But in the hours after the Fed's announcement, the yield on Treasury's benchmark 30-year bond fell to 7.37 percent from 7.51 percent Monday.

Sometimes long-term rates decline in response to higher short-term rates because bondholders believe their investments will be protected from inflation.

Stock prices, meanwhile, swung widely in reaction to the aggressive tightening but recovered strongly. The Dow Jones average of 30 industrial stocks closed at 3,784.57, up 24.28 from Monday.

Tuesday's action was widely anticipated by both securities traders and economists, although many were looking for a less dramatic move - a quarter-point increase in the federal funds rate and no change in the discount rate.

It was the fifth increase this year, to 4.75 percent, in the federal funds rate banks charge each other. It was the second this year, to 4 percent, in the discount rate the Fed charges on its own loans.

``The actions are intended to keep inflationary pressures contained, and thereby foster sustainable economic growth,'' the Fed said in a statement.

It held out hope it would leave rates alone for now, saying ``these actions are expected to be sufficient, at least for a time.''

Staff writer Mag Poff contributed information to this story.