Easier Credit

After months of a steadily tightening money market, economists last week detected some loosening.

One indicator was the Treasury Department securities market. When the Treasury last week offered to exchange twelve-month certificates and 39-month notes for $10.2 billion in securities due in five weeks, it was able to set the interest at 3 3/8% and 3 1/2% respectively, both lower rates than would have been possible just a month ago. The market for other Treasury issues has also showed a big improvement lately. The rate on 90-day Treasury bills, most sensitive of all money barometers, slipped from a peak of 3.3% in mid-December to 3.1% last week, while medium-term taxable bonds dropped to 3.35% from their 3.52% peak set in early January. The overall bond market reflected the different tone; the interest rate on prime Aaa-grade corporate bonds dipped from 3.82% to 3.22% by the end of January.

While the Federal Reserve Board denied that it is purposely easing credit, it has nevertheless allowed the easing to take place without clamping on countermeasures. One figure that economists watch with increasing interest is the "free reserve" position of banks in the Federal Reserve System, which is calculated by comparing the excess reserves of member banks with their total borrowings from the system. Last April member banks had negative free reserves of some $533 million; i.e., they borrowed more than was covered by reserves, were thus in debt to the Federal Reserve and badly pinched for money. Since then the banks have been building up reserves until they briefly edged over into the plus column by $222 million in mid-January before swinging back into the debit column again by $368 million.

Another sign of easing is that bank loans and bank investments dropped by $2.3 billion in January, as businessmen lived off their inventories and postponed marginal expansion plans rather than borrow heavily at high interest rates. In addition, January also brought a sharper than seasonal liquidation of bank credit, in which heavy repayments of loans more than wiped out a big credit increase in December.

FRB economists say there are hints that prices may be tapering off after their long upward climb, particularly in copper and scrap steel (see below). While FRB's cautious moneymen are not yet sure whether the ease is temporary, they are fully alert to the possibility that the worst may be over.

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