Fall Storm Ahead

With the economy picking up, the Federal Reserve Board has enjoyed a rare season of peace. Normally, politicians and businessmen accuse the Fed either of creating inflation by pouring out too much money, or of strangling business by holding back on cash and credit. Throughout the spring, however, the board's governors pursued a neutral policy, feeding out money just fast enough to keep pace with the expansion in sales, production and inventories.

This situation is almost certainly too idyllic to last. Interest rates have been inching up lately; recently, Pittsburgh's Mellon National Bank & Trust Co. lifted its prime lending rate for businessmen by 1/8%, to 5 1/2%, and some other major banks have followed suit. By fall, board members fear, the growth in loan demand that accompanies a business surge will put upward pressure on mortgage, consumer credit and some other interest rates. In addition the Treasury will have to begin borrowing heavily by late summer to finance a growing federal deficit. It is now estimated that the Treasury's red ink for fiscal '73 could reach $35 billion, v. $23 billion last year.

New Target. Thus the independent Fed is sure to come under heavy White House prodding to pump out enough money to bring interest rates down again. The Federal Reserve governors have already taken one step to resist such pressure. In recent months the board adopted a new operating method to influence the money and credit available to the economy. The method focuses on a new target: bank reserves against private deposits. In effect, this tactic emphasizes new precision in the control of vast aggregates of money and puts less stress on influencing specific interest rates. Thus the board is purposely paying less attention to interest rates in its day-to-day decisions.

Federal Reserve Chairman Arthur Burns is deeply concerned about the danger of inflation, and to ease the pressure, he will likely make a show of jawboning down any untoward increases in rates. As for the Federal Reserve, it is expected to hold to its measured money policy, even if it allows most interest rates to rise just before the election.

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