Another Signal

The Federal Reserve Board's increase in the discount rate from 4% to 4 1/2% in November was primarily a reaction to international pressures on the dollar created by the devaluation of the British pound. Many observers saw it also as a domestic signal that the Fed was disturbed by inflationary pressures that continued to rise even as Congress was refusing to pass a surtax. Last week Federal Reserve Chairman William McChesney Martin and his governors tipped another signal that they are worried about inflation. The board ordered an increase in the reserves of its member banks. The order affected about 2,000 banks --those that have demand deposits of over $5,000,000. Under it, in two steps this month, the banks must increase their reserves with the Fed by $550 million. Bankers agree that the move was probably right. But they protested the fact that small banks with less than $5,000,000 in demand deposits were excluded, and they argued that Government should also undertake some tightening through fiscal restraint.

With less money available to borrow, all sections of the economy will feel the pinch. But as the Fed intended, it will be modest. Even the stock and bond markets, normally the first to react strongly to tighter money, took the news without a noticeable tremor because both had been expecting it.

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