Indicator of the Week

A few weeks ago, bankers were cautiously predicting that their prime rate--the interest charge on loans to the most creditworthy corporations--would top out at 9 1/2% in the fall. Last week the prime hit that level much earlier, and no one voiced the slightest belief that that would end the dizzying ascent from 6% in January. Bankers and economists are now forecasting a series of further rises to 10 1/2% or even an unheard-of 11%.

The major reason is that the climb in the prime has not yet discouraged ravenous loan demand from business. No reason why it should, either: strangely enough, borrowing at a 9 1/2% prime is potentially profitable for some businessmen. Other interest rates have shot up even higher, including those that the bankers themselves must pay to attract deposits. As a result, last week a big corporation could borrow from the bank at the 9 1/2% prime, then lend the same dollars right back to the same bank at a profit by buying a 90-day certificate of deposit (CD) yielding as much as 11%. Because heavy loan demand has been draining out their money, banks must pay these rates in order to attract funds.

Bankers, however, are not the only ones being hurt; less money is available for nonprime borrowers. For example, money for mortgage loans and for loans to students is drying up, partly because interest rates are lower; the Federal Government imposes an 8 3/4% ceiling on student loans.

The Federal Reserve Board recently has been ladling out money to the economy at a slower pace. The nation's money supply grew at a better than 10% annual rate last month, but lately the rate has slipped to 7%. By historic standards, that is still a rapid increase, but it is not swift enough to supply all the funds that borrowers of all kinds want to get their hands on. The Federal Reserve governors believe that borrowing must be discouraged in order to cool off an inflationary economy.

Consequently, bankers can see no way at the moment to get off the interest-rate treadmill. Wright Patman, chairman of the House Banking and Currency Committee, has urged President Nixon to order an interest-rate freeze or rollback, but there seems little chance that the Administration will take his advice. The best hope that bankers can offer is the rather wan one that eventually the psychological shock of a 10 1/2% or 11% prime will finally make chiefs of big corporations think twice about seeking more loans.

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