Which Way for Interest Rates?

Daily movements in interest rates have become as closely watched as baseball box scores. For three years, the cost of borrowing money has been painfully high and shockingly erratic. This summer, however, the news from the money market has been good enough to cheer about. Since July, the prime rate that banks charge for short-term corporate loans has fallen from 16.5% to 13.5% and aroused hopes for a sustained decline in interest costs.

Though this new optimism has buoyed businessmen and excited the stock market, TIME's Board of Economists warned last week that the progress on interest rates will probably soon stall. The board predicted that the prime will bottom out at 12% by the middle of next year and then begin to rise again.

John Paulus, chief economist at the Morgan Stanley investment firm and a respected interest-rate watcher, predicted that short-term rates would probably fall on balance over the next year, in part because of weak corporate demands for credit. The Federal Reserve Board, he contended, would continue to ease slightly its control of the money supply to slow down the tide of business bankruptcies and promote growth. He predicted that the prime rate would dip to 11% next year before turning up.

Paulus was less sanguine about the outlook for interest rates on long-term bonds, which finance capital spending. Even after a drop of more than one percentage point since July, the rates on top-quality industrial bonds still hover above 13%. Because the prospect of huge federal budget deficits is likely to rekindle fears that inflation will reaccelerate, Paulus said, long-term rates may remain around current levels in 1983 or even edge up slightly.

Several of TIME'S economists had slightly differing interest-rate outlooks. Charles Schultze said that a fairly strong economic recovery could cause a new surge of credit demand that might send the prime rate back up again. On the other hand, Walter Heller predicted that while short-term rates like the prime might creep lower a bit, a further cooling of inflation would result in somewhat lower long-term interest costs throughout next year.

Consumers have less reason than businessmen to be hopeful about the cost of borrowing. The average rate on an automobile loan has fallen only half a percentage point, to 17.1%, since last November. Long-term fixed-rate mortgages have dipped from 18% to as low as 15% in some parts of the U.S., but are unlikely to fall issue more. Banks and savings and loan associations are reluctant to issue cheap long-term mortgages for fear that short-term money rates will surge anew and drive up the interest they must pay on deposits.

The consensus of TIME'S board members is that interest rates will remain far above what they were during past economic recoveries. They believe that only a dogged for to reduce the federal deficit and continued progress on inflation for several years will produce a sharp, and lasting, break in the cost of borrowing money.

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