An Easing by the Fed

For months, as soaring interest rates drove the cost of borrowing to record peaks, businessmen, labor leaders and economists voiced one plaint: excessively tight credit threatened to push the nation into deep and long recession. For some industries and for millions of individuals the recession has already struck. The dream of buying the single-family house has evaporated along with the drying up of mortgage money; housing starts in August fell 45% from the year-earlier rate.

Now at long last, there are hopeful signs that the Federal Reserve Board is making more money available for credit. Fed Chairman Arthur Burns last week told a conference of financial men in Washington, B.C.: "There will be no credit crunch in our country ... It would be undesirable to further intensify monetary restraint." Though he did not specifically say that there would be an easing, the money markets early in the week flashed a signal that it was already going on. The Fed allowed federal funds --uncommitted reserves that banks lend to each other--to trade in the 11% to 11 1/2% range, v. the previous 12% or more. The change indicated that slightly more money was available for lending, and that the Fed was endorsing it.

Boomlet of Optimism. The shift was what money-market watchers had been waiting for, and it triggered a boomlet of optimism. Treasury Secretary William Simon foresaw a "further decline" in short-term interest rates; since early September three-month Treasury bills have dropped from 9.3% to 7.6%, and there have been other declines as well (see chart). Chase Manhattan Chairman David Rockefeller and other bankers predicted that if this trend continues, the prime rate--the one charged to banks' most creditworthy customers--may well drop from 12% now to 10% by year's end.

The biggest reaction came in the stock market, which has been grasping all summer for firm signs of abatement in interest rates and inflation. The Dow Jones industrial average, which only two weeks ago plunged to a twelve-year low, soared most of last week, gaining 47 points until it cooled off and lost 3 points on Friday, closing at 671.

The Fed is clearly moving toward a somewhat less restrictive money policy than before. But these moves appear to be more corrective than indicative of any major monetary shift. Since May, the growth of the nation's money supply has been at or near zero. Not even the Fed had intended it to fall so far, and the recent easing is mainly a counterbalancing measure to lift money growth back toward the 5% to 6% range that the Fed is believed to want. The buildup is expected to be slow, with no explosive growth allowed in the next several months, to counter the zero growth of the past four months. Burns stressed last week that "a policy of moderate monetary restraint remains appropriate." Indeed, a 5% to 6% rate of growth would be fairly restrictive and anti-inflationary at the present time.

The battle against inflation took on renewed magnitude last week when the Labor Department reported that the consumer price index, paced by rises in food, clothing and medical services, jumped in August by 1.3%, equal to a compound annual rate of 16.8%. It was the biggest inflationary surge in a year, and it cut factory workers' real take-home pay by .9%, down to a level 4.1% below a year ago. At the moment, consumer prices are more than 50% higher than in 1967.

The Administration had its work cut out for its summit on the economy this week. To help distill into policy whatever comes from that meeting, President Ford recalled an old inflation fighter: He is Paul McCracken, 58, who was President Nixon's chairman of the Council of Economic Advisers from 1969 to 1971. A conservative, McCracken generally opposes controls and favors balanced budgets. He is an old friend of Ford's and teaches at the University of Michigan. McCracken says that he expects to stay in Washington only long enough to "sort out ideas" from the summit and draft policy suggestions. But his brief service, coming as it will during and after the grand meeting, is expected to substantially shape the Ford Administration's economic policy.

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