Selective Stimulus

With slowdown signposts appearing all over the U.S. economy, the Federal Reserve Board last week moved to ease the cost of money. In its own words, the board meant to assure "that the availability of credit is adequate to provide for orderly economic growth."

In a two-stage order that becomes fully effective next week, the board reduced from 4% to 3% the amount of interest-bearing time deposits that banks must keep on hand as unlendable reserves. The change applies only to the first $5,000,000 of a bank's total time deposits; anything over that remains under the stiff 6% reserve requirement imposed during last summer's credit squeeze. This partial easing will free an additional $850 million for lending, mostly in 5,945 rural and small-city banks. Bankers can already lend about $7 for every $1 they have in reserves, and this "multiplier effect" will therefore allow the newly liberated $850 million to ripple through the economy as a $6 billion credit stimulus.

Simmer Down. To be sure, the stimulus will be selective: big-city banks, whose time deposits far exceed the $5,000,000 that qualifies for the Fed's lower 3% requirement, will find the new funds relatively less important. But the easing measure promises to give some breathing room to such hard-pressed sectors of the economy as housebuilding. In San Francisco, Bank of America President Rudolph Peterson welcomed the Federal Reserve Board's "help to stimulate expansion, particularly in the housing area," promptly cut rates for some home mortgages from 6 3/4% to 6 1/2%.

The Fed also aimed to slap down loose talk, particularly prevalent in the New York money markets, that it has already gone about as far as it will in easing the money supply. Acting on that notion, corporations threatened a ruinous replay of last summer's credit crisis by once again lining up to borrow. On the bond market alone, new corporate issues scheduled for this month total a record $1.5 billion--which could spark a new upward spiral in bank and bond rates. The Fed's warning seemed to have effect. Key 91-day Treasury bills, which had been quoted at a yield of 4.68% as recently as six weeks ago, simmered down to 4.34% after the announcement.

All Too Cool. The Fed's action was salve to the stock market. The Dow-Jones industrial average had already worried off 14 points from its Feb. 8 high of 861 for the year when the market met one of its all-too-familiar Mondays. Hit by a scatter shot of news about turndowns in steel, machine-tool and rail-equipment orders, the Dow-Jones plunged 10.69 points--its biggest drop in three months. When the Fed's easy-money move came at midweek, it helped power the market to a 4.12-point gain in a trading day so turbulent that at one point the stock ticker was twelve minutes late.

At week's end, the Dow-Jones closed at 846.6, having made up all but a fraction of Monday's damage--despite a continuing parade of signs that the lately overheated U.S. economy is growing too cool. The Commerce Department reported that factory orders had slipped 4.6% in January, causing the sharpest downturn in manufacturing order back logs since the 1960-61 recession. And as far as automakers in particular were concerned, February was even chillier. Compared with the same month last year, sales were down 23.5% at G.M., 24.1% at Ford, and 22.7% at Chrysler. Should the worrisome statistics continue for many more weeks, Washington's economists are betting that the Administration will have to match the Fed's monetary moves with some fiscal stimulus of its own--perhaps even putting off its proposal for a 6% tax surcharge.

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