Heightening Interest

One economic indicator close to the heart of every American--the cost of borrowing money--has not followed the usual recovery curve. Interest rates classically move up and down as the economy does; it costs more to borrow money when recovery gets going. But this year, interest rates have risen scarcely at all--despite the fact that the Federal Reserve industrial production index hit an alltime high of 112 in July. Says Vice President John J. Barry of Boston's National Shawmut Bank: "Right now there seems to be an equilibrium between supply and demand for funds.''

Below Capacity. Why is interest holding steady? Part of the reason is that the cost of borrowing held firm through most of the slump, is now higher than it was during the recovery year of 1955 and about as high as in recovery 1959 (see chart). Another reason is that many influential figures in the Kennedy Administration, led by Presidential Economic Adviser Walter Heller, favor the principle of "easy money" and have won at least limited concessions from the more cautious Federal Reserve Board chairman, William McChesney Martin. The Fed has not only held its discount rate at 3% since August 1960 but has started a new policy of buying U.S. notes and bonds of longer maturity to keep the rates on them down (TIME, March 3).

Besides, some of the upward pressures that an expanding economy generally exerts on interest rates are missing this year. So far, the Fed has not had to boost borrowing rates to head off inflation, because prices have remained fairly stable throughout the recovery. President Kennedy is reluctant to take any counter-inflationary step that might slow recovery. so long as 6.9% of the work force remains unemployed. For the moment, too, with the U.S. balance of payments in relatively good shape and the pressure on U.S. gold reserves consequently diminished, the Administration feels no great need to juggle interest rates in order to prevent gold from flowing into higher-interest foreign nations.

Above all, the supply of lendable funds remains high. Personal income is up to a record $419 billion annual rate, and the nation's cautious consumers have been banking 7% of their disposable income. Industry is not rushing to borrow, for plant overcapacity persists despite July's 2% rise in production. Says one Fed official: "It is hardly reasonable to expect higher interest rates when our output is still running far below what we can do."

Room for a Rise. Within the next 12 to 18 months, however, pressures for higher rates are likely to grow irresistible. So far, Britain's new 7% bank rate has not lured much "hot money" out of the U.S.--partly because of fear that London may yet have to devalue the pound. But any sign that U.S. money was being attracted in volume by higher European interest would almost certainly force the Fed to drive up U.S. short-term rates.

Whatever happens abroad, the trend of the domestic economy seems sure to be against a continuation of easy money. Mortgage rates have been firming, will go up if housing demand continues to rise as it has for the past three months. Meantime, the additional $3.45 billion that the President intends to spend on defense will spur expansion in industry and also make the Government a bigger borrower. When the demand for credit rises, the supply of money to lend is likely to shrink. The history of past recessions shows that consumers start spending instead of saving as soon as they become convinced a new boom is in the making. And more consumer spending means more credit buying --which will step up still more the push toward higher interest.

This file is automatically generated by a robot program, so reader's discretion is required.