Lower Interest Rates Ahead

Not long ago, the discount ratethe interest charge on Government loans to commercial bankswas the Federal Reserve Board's main tool for influencing the economy, and changes in the rate occasionally became hot political issues. In the past year and a half, the Federal Reserve has relied mainly on changes in the pace at which it expands the nation's money supply, and has let the discount rate stay at 6%. When the board finally cut the rate a quarter-point last week, the reaction in the financial community was cheerful butunexcited.

The reduction followed much sharper declines in many other interest rates. The Treasury bill rate, for example, has fallen from last year's peak of more than 8% to 5 1/2%. The discount-rate reduction put the Federal Reserve's stamp of approval on these declines, and showed that the board's seven governors believed that the U.S. economy could stand a further easing of interest rates. New York's Chase Manhattan Bank promptly took the hint and led major banks in trimming the prime rate--the minimum lending charge on loans to business from 7 1/2% to 71 1/4%. The drop, the third in the prime so far this year, will possibly lead to some small reductions in charges for consumer loans, though not immediately in home-mortgage rates, which are slow to respond to changed market conditions.

Federal Reserve Chairman Arthur Burns said last week that the board should make "small and frequent" changes in the discount rate as a way of nudging the money markets without jolting them. The board is thinking of changes as small as tenths of a percent. It is likely to make another modest cut in the discount rate before year's end. Its economists worry that U.S. business is not recovering as rapidly from the early-1970 slowdown as they had hoped, and they would like to help business along. Bankers are ready to follow another discount-rate cut with a fourth lowering of the prime rate. Their business loan demand has fallen markedly lately, and they do not think that the drop is entirely because of the G.M. strike. Further rate reductions will bring welcome relief from one of the worst economic pains of the past two years: the high cost of loans.

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