Free Fall

Early in the wage-price freeze, labor leaders and some Democrats urged President Nixon to slap controls on interest rates too The Administration refused, contending that free-market rates were poised for a drop that controls might actually prevent. As Phase II begins, with loan charges still uncontrolled, that judgment seems vindicated. Interest rates have declined substantially over a broad front, making this part of Nixon's New Economic Policy an unqualified success for the moment.

The fall in rates lowers costs both for businessmen borrowing to buy new equipment or to build inventory, and for consumers financing major purchases through bank loans. Even the banks' own borrowing is becoming less expensive. Last week the Federal Reserve cut its discount rate, the fee it charges on loans to member banks, by a quarter point, to 4 3/4%. A continued drop in interest could help stabilize the politically sensitive Consumer Price Index. Interest rates on home mortgages and auto-purchase loans, for example, are figured into the cost of buying housing and cars.

Effective Jawboning. Washington has not ignored interest rates. Treasury Secretary John Connally has forcefully expressed to bankers his wish for cheaper money. Such jawboning seems to have had some effect. Bank charges on personal loans lately have fallen from 5 3/4% to 5 1/4%, and New York's First National City Bank has chopped its mortgage rate three-eighths of a point, to 7%. Bankers say privately that one reason for these declines is a desire to confirm the Administration in its belief that no direct controls on interest are needed.

The freeze itself helped push down bond interest rates, by giving lenders and borrowers more hope that inflation would be brought under control. Bond interest rates traditionally are composed of a 3% "basic" rate and a so-called inflationary premium tacked on in anticipation of a further erosion of the dollar's value. High-quality utility bonds that sold at an average yield of 8 1/4% before the freeze now go for 7 1/2%.

Gathering Momentum. By far the most important force dragging down rates, however, is an imbalance between money supply and demand. Despite recent tightening, the Federal Reserve has pumped large quantities of lendable funds into the economy this year. But loan demand from business has been sluggish, a reflection of the slow pace of recovery from the 1970 recession. With more money to lend than their corporate customers seem to want, bankers have cut their "prime" rate on business loans from 6% to 5 1/2%. Rates on commercial paper--promissory notes sold by business to raise short-term cash --have fallen too, and that drop could put more downward pressure on the prime rate. Such major banks as First National City and Irving Trust in New York and First National in Boston have introduced a "floating" prime rate that can be changed weekly in response to commercial-paper movements.

Some moneymen believe that the drop in rates will soon be reversed. "The economy is gathering momentum," says First National City Chairman Walter Wriston, "and when companies get confident enough to build inventories, loan demand will rise." That could push rates back up by year's end or early in 1972. Federal Reserve Chairman Arthur Burns sought to counter such talk last week by promising that the Board will make enough money available to meet the needs of an expanding economy. It was no coincidence that he delivered his reassurance at the New York Stock Exchange. The stock market is the one sector of the nation's financial markets that seems to have been depressed rather than cheered by the freeze. Last week the Dow Jones Industrial Average tumbled 27 points to a new 1971 closing low of 813.

The latest stock-market plunge has dimmed President Nixon's reputation as a Wall Street prophet. On April 28, 1970, Nixon pronounced the time right for buying stocks; a year later, anyone who had sunk $10,000 into an average New York Stock Exchange share on his advice would have had a profit of $3,103. By last Friday's close, however, that paper profit had been just about cut in half, to $1,535.

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