A Welcome Drop

All summer borrowers have been waiting for evidence that a drop in interest rates would turn out to be the real thing rather than a temporary flutter. Last week they got a strong sign as the bond market passed a critical test. On a single day, New England Telephone and Telegraph and International Harvester simultaneously floated issues totaling $275 million, a financing load that in almost any week earlier this summer would have depressed bond prices and sent interest rates soaring again. Somewhat to the surprise of underwriters, nearly all of the bonds were sold promptly, and interest rates stayed down.

New England Telephone's $175 million of bonds will yield 8.65%, a sky-high rate by historic standards but well below the record 9.35% rate on a New Jersey Bell offering in mid-June. Some other interest rates have shown even greater declines over the same period; the average yield on tax-exempt bonds issued by states and cities, for example, has fallen to 6.16% from a record 7.12%. The "federal funds" rate at which banks borrow reserves from each other is down to 6.75% from 9.75% early this year. Even home-mortgage rates have backed off a bit from their highs, easing to an average 8.97% from 9.3% at the end of June. The drops have brought home buyers and state and city treasurers their first welcome financial news in many months.

Percolating Again. The fall in interest rates is the strongest--though far from the only--sign that cash and credit are again beginning to percolate through an economy that had seemed on the point of running out of lendable money last spring. Banks and savings and loan associations, long strapped for funds, have been taking in abundant new cash. Total time deposits at commercial banks have risen 21% in the past five months, to $211.5 billion. The rise has accelerated since Washington in June permitted the banks to pay any rate they wished on large time deposits. The banks can lend more of the money too--directly or through the bond market--because the Federal Reserve Board has also reduced the proportion that they must keep in reserve. S and Ls took in $508 million of deposits in July, a record for the month. As a result, they were able to make $2 billion of new mortgage loans in July, 5% more than a year earlier--the first such year-to-year increase in twelve months.

There are several reasons why money is becoming more available. Business demand for loans has ebbed with the nation's economic slowdown, making it easier for banks to meet the remaining loan demand. The commercial and industrial loan volume of major New York City banks has dropped $1.6 billion so far this year, v. a $630 million rise in the equivalent 1969 period. Consumers lately have been saving an unusually high 7.6% of their incomes, largely because they fear further rises in unemployment.

The principal source of the renewed money flow, most economists suspect, is the Federal Reserve, which is now practicing a more expansionary policy than Chairman Arthur Burns has been talking. In the first half of 1970, the board increased the nation's money supply (including time deposits) at an annual rate of 5%; Burns later declared publicly that this was "about right." In the last two months though, the annual rate of increase has averaged more than 16%. Considering its fears of renewed inflation, the board is unlikely to go on pumping out money for long at quite that pace. In a May directive that was recently made public, however, the Federal Reserve did decide to pour out as much credit as might be required to ease the severe strains that then threatened to disrupt financial markets.

The policy seems to have spread the desired tranquillity. Spring fears of a "liquidity crisis" that might force other major corporations to follow the Penn Central into bankruptcy have subsided. Indeed, conditions have eased so much that two tiny banks--Canal National Bank of Portland, Me., and Citizens Bank of Jonesboro, Ark.--in the past two weeks have cut their "prime" loan rate (the minimum charge from which all other rates on business loans scale upward) from 8% to 7 1/2%. Big-city banks are not yet ready to follow, but moneymen are increasingly hopeful that they will do so sometime this fall. Commerce Secretary Maurice Stans at week's end went further to say that he could foresee the prime rate and the yield on corporate bonds dropping to 6% "in the foreseeable future"--although he prudently declined to fix a date.

This file is automatically generated by a robot program, so reader's discretion is required.