Loans Will Cost More

Federal Reserve Chairman Arthur Burns recently told a congressional committee: "I cannot encourage the thought of lower interest rates in the immediate future." Burns' message: Even though short-term rates are rising fast, he will no longer use the jawbone on bankers to restrain them. Instead the Federal Reserve will work to cool the overheated economy and reduce inflation by restricting the availability of money and credit. Result: it is a tough time to borrow but a good time to save.

After the Fed raised its discount rate two weeks ago, banks boosted the prime lending rate to businessmen from 7 3/4% to 8%, and then to 8 1/4%. Banks were offering 9% on 90-day certificates of deposits, and even some long-term bond rates were nudging upward. To forestall a rush of money out of personal savings accounts into higher-yielding bonds and Treasury bills, the Government lifted the limit on interest rates that banks may pay depositors by 1/2%, to 5%, and permitted savings and loan institutions to raise their rates from roughly 5% to 5 1/4%.

The change in Fed policy was prompted by the inflationary expansion of the money supply, which in the second quarter grew at an annual rate of almost 10%. One cause of the bulge was an unusual surge in loan demand. Now the Fed is determined to restrain the money supply, but will work to avoid drying up credit, which would bring on an early recession. Burns would like the Administration to take some of the pressure off the Fed by raising taxes. But the White House is wary of such a move. Once again, the Administration's economic policymakers are out of phase at a time when the nation needs concerted economic leadership.

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