Lower Interest, Maybe

Even though the Federal Reserve has been squirting money into the U.S. economy all this year at a clip ordinarily fit to make loans grow cheaper, the result instead has been a persistent rise in interest rates. Last week American Telephone & Telegraph Co. borrowed $250 million for 33 years at the highest interest cost it has ever paid for long-term bonds: 6.006% a year. A. T. & T.'s old record, 5.95% for $100 million of 20-year debentures, had stood since 1923.

The new mark may go unchallenged for quite a while. If Congress heeds President Johnson's call for a 10% income tax surcharge (see THE NATION), it could ease the monetary pressures that have lifted interest rates to monumental peaks. The mere presidential request for higher taxes set off a small retreat in municipal bond yields, from an average 3.98% to 3.91% for 20-year issues. And big investors scurried to snap up the last half of the big A. T. & T. debentures, which they had been spurning on the ground that the rate should have even been higher. Many corporations postpone bond offerings if interest rates leap too high. "We don't have much option," says A. T. & T. Vice President-Treasurer John J. Scanlon. Reason: as the nation's largest private borrower, the Bell System must tap the market almost every month.

Close to Hysteria. Interest rates have climbed this year partly because of stepped-up borrowing by local governments, and partly because of the vast appetite of corporations to replenish their coffers after last year's tight-money pinch. New private and public bond issues rose to a record $10.4 billion during the first half of 1967 as against $8.4 billion in the first months of the year before, in what Partner Sidney Homer of the Manhattan bond house of Salomon Brothers & Hutzler calls "an exceptional, almost hysterical stampede to the money market."

A large part of that rush for funds has been Washington-inspired. Without higher taxes, the U.S. Treasury would be forced to siphon nearly $15 billion out of the long-term money market during the second half of 1967 to pay the deficit-plagued Government's bills. Another $25 billion of maturing federal debt must be refinanced. Figuring that Treasury financing on such a scale would drive interest rates above their present levels, many corporations have accelerated their borrowing lest they be caught in another credit squeeze.

If They Are Right. Securities underwriters still foresee a heavy demand for money in the weeks ahead. "Everyone is coming to the market at once," frets Partner Herman Kahn of Manhattan's Lehman Brothers. "And not merely in the U.S., but worldwide." Later in the year, however, most bond dealers expect the scramble for loans to dwindle. Last week's tax message heightens that prospect in part by removing much of the uncertainty. If bankers and economists are right, it also portends easier money and somewhat cheaper credit for businesses.

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