What Easier Credit?

For the fourth time in five months, the Federal Reserve last week eased the U.S. credit supply. To Reserve districts in New York, Chicago, Philadelphia, St. Louis and Minneapolis, Chairman William McChesney Martin and his governors gave permission to drop the rediscount another 1/2% (to 1 3/4%) on loans to member banks, and sliced bank reserve requirements. Thus the FRB released a potential of $2.7 billion in new credit into the nation's money stream.

Partly, FRB acted to relieve a sharp $600 million drain on bank reserves caused by heavy purchases of gold by foreign nations, largely Great Britain, whose exchange position has improved dramatically in recent months. More important, the FRB was increasingly anxious to stimulate the lagging U.S. economy by making credit both cheaper and more plentiful.

But the sad fact is that FRB's five-month campaign to ease credit has failed so far to cut interest rates appreciably. Though Federal Reserve banks have cut their rediscount rate 1 3/4%, only a few loan categories such as 90-to-180-day bankers' acceptances and short-and medium-term commercial paper have followed with similar declines.

Other rates are still at near-record levels:

l| The prime rate for industrial loans is still at 4%, only 1/2% below the boom's peak, and keeps all other rates high.

P: Auto loans still average 6 1/2%.

P: Home-improvement loans cost 5%.

P: Small business loans are still 6%.

While some bankers agree that businessmen and consumers are holding back because of high rates, many financial men from coast to coast are dead set against cheaper interest. They argue that it does not create as much demand for loans as reducing reserve requirements to make more loanable funds available. Besides, say bankers, lower rates mean trouble on the profit and loss statement.

Commercial banks, which historically paid only 2% to 2 1/4% on savings accounts, must now pay 3% to compete for funds and do not have much margin for operations if prime rates drop any lower than 4%. As a result of the cost squeeze, says one New York banker, "there has been no lending at all in New York below the 4% prime rate so far. And there are very few exceptions out of town. The loan ratios are high in all categories, and sentiment is firm against lowering the prime rate."

But what bankers fail to explain, and what borrowers--who find the cost of money too high--find irritating, is that bank profits are still rising despite all the wailing about zooming costs. Last week Manhattan's First National City Bank, Manufacturers Trust and Mellon National Bank & Trust all reported first-quarter earnings sharply higher than last year, up as much as 10%.

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