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Fed Cuts Key Rate; Jobless Ranks Up 0.6%

March 09, 1986|From Associated Press

The Federal Reserve Board Friday cut a key interest rate from 7.5% to 7%, a move that immediately began pushing down other interest rates.

Immediately after the nation's central bank reduced its discount rate--the interest charged in making loans to financial institutions--major banks began cutting their prime rate to 9% from 9.5%, the lowest level in more than seven years. The prime rate is the rate banks charge on loans to their most credit-worthy customers.

Also Friday, the Labor Department reported that civilian unemployment jumped to 7.3% in February. The 0.6% gain was the largest in nearly six years.

Bad weather in agricultural areas of California, a slumping oil industry in Texas and manufacturing layoffs in Illinois accounted for nearly two-thirds of the 0.6% surge that saw 400,000 people join the ranks of the jobless, department analysts said.

Met With Surprise

The magnitude of the jump surprised government and private analysts alike. Beryl W. Sprinkel, chairman of the President's Council of Economic Advisers, called the increase "bad news" but said it should not be viewed "as a trend but merely as an aberration."

Sprinkel joked that when the news was made available to government officials late Thursday, his phone "rang off the hook" with calls from White House policy makers, asking him to explain the bad news before television cameras this morning. He noted that he is not asked to comment on good news.

Economists generally predicted that the jobless rate will soon return to a level of at or near 7%.

The unemployment figures were announced one day after the nation's major retailers reported lackluster results in February sales.

Similar Cut in May

The discount rate cut was the first change in the rate since a similar 0.5% cut in May. It followed cuts Thursday and Friday by several foreign countries of their own discount rates.

A drop in the discount rate is the most dramatic signal the central bank can give to send a wide variety of interest rates, including mortgage rates, lower.

The prime rate cut, initiated by Chase Manhattan Bank and followed by Chemical Bank, was the first since June and brought that rate to its lowest level since August, 1978.

The surge in the unemployment rate was unexpected and puzzled analysts, who pointed to unusually severe weather after an abnormally mild January as their best guess for the cause.

Mainly in 3 States

Two-thirds of last month's 700,000 surge in the jobless ranks came in just three states--California, Texas and Illinois. One-fourth of the increase came among Latino workers.

The big increase returned unemployment to levels that had been in effect during the first half of 1985, when the jobless rate was stuck at 7.3% for six months.

Analysts commenting on Thursday's retail sales reports attributed the sluggishness to high levels of installment debt held by Americans.

In its regular monthly sales report released Thursday, Sears, Roebuck and Co., the nation's largest retailer, reported a 2% drop in sales for the four weeks ended March 1 from the same period last year.

Sales Gains Reported

No. 2 K mart Corp. reported that its sales rose 1.4% overall, while sales fell 1.2% at stores open more than a year; third-ranked J.C. Penney Co. had a 7.4% sales gain; No. 4 Dayton Hudson Corp.'s sales rose 14.2% overall and 8.8% at stores open more than a year; and Wal-Mart Stores Inc., the fifth-largest, had a 42% sales gain overall and 19% rise in stores open more than a year.

In the bond market on Thursday, prices of long-term government bonds, which move in the opposite direction of interest rates, rose more than $5 for each $1,000 of face value.

The gains were attributed to the news that the West German central bank had, as expected, cut its discount rate--the interest it charges on loans to commercial banks--to 3.5% from 4%. The Bank of Japan announced Friday that it was cutting its discount rate Monday, from 4.5% to 4%. Holland cut its discount rate to 5.5% from 6%, following Germany.

The renewed hope of lower interest rates also spurred the stock market on Thursday. The Dow Jones industrial average gained 9.94 points to finish at 1,696.60, while in the broader market advancing issues outnumbered decliners by 9 to 5 on the New York Stock Exchange.

--The Federal Reserve Board reported that the nation's basic money supply rose $3.7 billion in mid-February. The money supply known as M1, which consists of funds readily available for spending, rose to a seasonally adjusted $634 billion in the week ended Feb. 24 from a revised $630.3 billion the previous week.

--The Conference Board reported that the volume of help-wanted classified ads in 51 major newspapers declined slightly in January, ending a four-month string of increases. The private business research group said that the trend of improving labor market conditions apparently had begun to soften in some areas.

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