Hopes for a New Stability

One of the most serious threats to the nation's growing business recovery has been the possibility of a continuing rise in interest rates that would discourage borrowing by businessmen and consumers, weaken the stock market and abort a barely begun revival of the housing industry. Last week, however, a consensus formed among experts that a three-month upswing in credit costs is ending, and that interest rates are expected to hold steady, or even inch down. For example, James J. O'Leary, vice chairman of New York's United States Trust Co., now predicts that the bank prime rate on loans to business will hold steady at around its present 8%, at least until the end of this year, rather than rising to 8 1/2% as he had once expected. His reason: the Federal Reserve Board "appears to be in the early stages of a moderate easing" of its recent tight-fisted money policies.

As always, the Federal Reserve, which believes that it must operate in the deepest secrecy, refused to confirm that idea. Asked pointblank whether the board was in fact feeding a bit more lendable money into the nation's banking system, inscrutable Chairman Arthur Burns rumbled: "I couldn't answer that--I'm a central banker." But evidence of a slight loosening of Federal Reserve policy had already surfaced. Little more than a week ago, in an effort to calm jitters in the credit markets caused by the bankruptcy petition of W.T. Grant Co. (TIME, Oct. 13) and New York City's continuing financial crisis, the board pumped about $800 million into the banking system by buying federal securities. The proceeds were deposited in banks and had the effect of increasing bank reserves, giving the banks more money to lend and weakening upward pressure on interest rates.

Lowest Level. Evidence of a more liberal policy came last week from the board's actions on so-called Federal Funds--that banks lend to each other overnight. The interest rate on such loans is heavily influenced by the Federal Reserve's purchases or sales of Government securities. The board often uses the Fed Funds rate to signal its intentions on money supply; it will let the rate rise to show a tightening, permit it to fall in order to flash a sign of expansion. At one point last week, the board let the Fed Funds rate fall to 5.875%, the lowest level in two months, before it moved to nudge the rate up again. Last week the rate averaged 6.06%, down from 6.36% the week before.

Outside the money markets, these might seem less than earthshaking events. But the prospect of steady interest rates already is heartening. On the stock market, which is hurt by rising interest rates, the Dow Jones industrial average rose 10.70 last week, to a close of 823.91. In the bond market, a $200 million offering of 33-year debentures by Michigan Bell Telephone sold briskly at a 9.6% interest rate, a smidgen below the 9.7% rate on a Bell System issue on Sept. 17. Rates at auctions of three-month Treasury bills, a bellwether of the market for short-term money, have fluctuated between 6 1/4% and 6 1/2% for the past three weeks and are not likely to move above that range soon.

If indeed the Federal Reserve is moving to a more liberal position, its action comes none too soon. While there are many and confusing ways of calculating money supply, by one measure it has recently been growing at an annual rate of 1.6%. In the two weeks ended Oct. 1, the nation's money supply actually declined. If that trend were to continue, efforts by businessmen and consumers to borrow more money than lenders had available would push interest rates higher. One probable result: a greater flow of money out of savings and loan associations, which supply a huge chunk of the mortgage money for new homes, into Government securities and other investments that yield higher interest rates than the savings banks and S and Ls can legally pay. The nation's mutual savings banks lost an estimated $300 million worth of deposits in September, v. a net gain of $10 million in August.

There is no sign at all that Burns, who believes that a rapid growth of money supply would be inflationary, has changed his basic target: an increase of 5% to 7 1/2% a year in the U.S. money supply. But the Federal Reserve must become more liberal than it has been lately in order to achieve even that modest goal. Such a policy will not mollify Burns' numerous and vehement critics, who judge a faster increase necessary to meet the needs of a growing economy. Recently, for instance, some Congressmen accused Burns of trying in effect to repeal the tax cuts legislated by Congress this year, by increasing the money supply so slowly as to cancel out their expansionary impact. If the Federal Reserve at least puts out enough money to keep interest rates stable, it will ease one of the worst fears dogging the recovery.

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