Easier Money

To signal its significant shift toward an easier credit policy, the Federal Reserve Board last week made a headline-catching move. It cut the cost of loans to member banks by approving a drop in the discount rate to 3 1/2% from 4% for its district banks in Philadelphia and San Francisco. Such cuts are usually followed by similar cuts at the rest of the twelve Federal Reserve district banks.

Since many banks are still under strong pressure from businessmen for loans, bankers do not expect the Fed's move to bring any quick cut in commercial loan rates. But lower interest should come in time, since the Fed has also been quietly adding to the money supply for several weeks to help ease the demand on banks. Short-term rates have already started down. The discount cut was partly to bring the Fed's rate in line.

The Fed was careful to point out that the cut was not being applied to offset any business recession, as cuts usually have been in the past. Instead, said the Fed, it is meant to perk up the economy at a time when business is steady. It is also true that a growing number of economists and businessmen have complained that the tight-money policy was going too far, and squeezing off the normal growth of the nation.

The Fed has been tightening money since the last half of 1958 in an attempt to restrain inflationary pressures. Now, despite a slow advance in prices, the Fed feels that inflationary pressures are under control. Some of the unrealistic business exuberance in January that might have started another inflationary spiral in 1960 has been toned down. The Fed was not worried by a sharp rise in installment buying, which is usually the last form of credit to be affected by high interest rates. Installment credit in April rose $533 million to $40.3 billion, the biggest monthly gain since August 1959.

The discount cut is bound to make it easier--and cheaper--for the Government and business to raise cash. At the prospect of lower rates, long-term Government issues last week speeded up their recent climb; yield on one issue dropped to 3.93% v. 4.27% less than two months ago. Wall Street hoped that the Fed's next move would be to lower the 90% margin requirements on stock purchases. Brokers feel that the market, like the economy, has behaved well--and now could also use a little easier credit.

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