Open Before Christmas

For bankers, businessmen and consumers, the Federal Reserve Board last week had a Christmas present well in advance of Christmas. To supply more cash and credit for the Christmas shopping season, FRB added $1.3 billion to the lending power of its 6,200 member banks by allowing them to count all cash on hand as reserves. It also lowered the minimum reserves permitted big-city banks from 17 1/2% to 16 1/2% of deposits.

This was FRB's third move to ease credit in a year, and many businessmen thought it was overdue. The critics think that FRB has moved too slowly to get business moving, and that its previous moves have not been particularly effective. While it has cut the discount rate from 4% to 3% in two installments this year, the prime rate for loans has only dropped from 5% to 41%. Since the prime rate is only for blue-chip customers, long-term rates for poorer risks are still 6% or higher, though short-term rates have dropped. Banks in most parts of the U.S. have enjoyed some credit easing, but money is still tight in New York and Chicago, the nation's two biggest banking centers.

The FRB insisted that the new credit easing was a routine seasonal matter, but bankers and economists viewed it as a measure clearly designed to aid the static economy. One reason for FRB's caution is that it wants to avoid any sharp change in interest rates lest it step up the U.S. outflow of gold to nations with higher interest rates (see The Solid Gold Problem). Even more important, FRB is moving slowly because, like everyone else, it is unsure about where the economy is going -- and whether it needs a nudge or a big push of easier credit.

The economy last week showed signs of strength (see below), of weakness, and of conflicting pressures. Based on applications for unemployment benefits, a leading indicator for total unemployment figures, experts expect October to show less than the seasonal improvement.

And while there is more talk about deflation than inflation, prices are still on the rise. The Labor Department announced last week that the cost of living rose to an alltime high in September, nudging up 0.2% to 126.8 of the 1947-49 average. The Labor Department predicted a further rise for October.

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