Interest Rates Take a Dive

No financial topic has been the subject of more consternation during the past three years than interest rates. And no wonder. The cost of borrowing money, which affects virtually every area of the economy, has been at the highest level since the Civil War. Last week's fran tic activity on Wall Street showed that professional investors believe that falling interest rates may drop even further. There is much less agreement, however, about their longer-range course.

Over the past 20 months, the key interest-rate measures have seemed to defy the best efforts of experts to guide their course, or even to figure out where they are headed. The prime rate, for instance, the bench-mark borrowing rate for corporations, stood at 20% when President Reagan took office. It declined for three months before reaching 17% in April 1981, then suddenly shot up to 20.5% just one month later, only 1 point below the record 21.5% attained during the Carter Administration. After that, the rate began to wobble around at a very high level. It eventually fell to 15.75% last December, but then rose to 16.5% and stubbornly stayed there for five months until July. Now the prime rate and other key

borrowing costs are falling steadily. In the past four weeks the prime has declined to 13.5%. The federal-funds rate, which is the interest that banks pay for borrowed money overnight, has plunged from 14.58% at the end of June to 9%. The rates that most consumers pay have not fallen nearly

as fast. During the past month, the mortgage rate in many areas slipped from 18% to 16%, but auto loans at most commercial banks are sticking close to 20%, and installment credit is still about 18% in most areas of the U.S. Some relief may be in sight, though, for consumers. Irwin Kellner, an economist at New York's Manufacturers Hanover Trust, says,that by the end of 1982, auto loans may fall to 13%, and mortgages may be down to 15%.

The recent slide in the cost of borrowing money comes too late to help businessmen like Miles Schwartz, 58, who earlier this month liquidated his men's clothing store in Pittsfield, Mass., the 1888 Shop, because he did not believe that interest rates would ever significantly decline. Said he:

"I probably could have stuck it out another five years or so, but I knew that the ever higher interest rates would kill me." Paul Botos, 32, an auto worker who has been laid off since January, said last week that he hopes lower interest rates mean that he will get called back to his job at a Chevrolet plant.

Interest rates are falling now because the stagnant economy has depressed the borrowing demands of both consumers and businessmen. That lack of demand, in turn, has enabled the Federal Reserve to ease up on its tough control of the money supply without running the risk of fueling inflation again.

While the latest news on interest rates is good, many experts doubt that the U.S. economy will soon be returning to the halcyon days of 6% mortgages or an 8% prime. When business starts to pick up, consumers and businesses will begin borrowing more and rates could start creeping higher. Moreover, the Federal Reserve has stated that it intends to maintain a tight rein on the growth of credit in order to keep inflation under control. This is likely to keep the key interest rates in the 12% to 15% range for the next year.

Every turn in the economy produces both winners and losers, and the relative losers this time could be people with cash in the popular money-market funds. These have paid an average annual return of as high as 17% in the past twelve months. Since the funds make their money by investing in short-term Government securities and bank certificates of deposit, they will no longer be able to pay out as much as they did before. The average money-market yield is already down to about 11.5% and is likely to drop still further.

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