Easier Does It

More than anything else, investors, home buyers and borrowers of all sorts have been awaiting one particular event: a sign of some easing of the high interest rates that have been squeezing credit and the securities markets dry for months. Some early indications of ease appeared in September, when the Federal Reserve Board increased the amount of money available for lending and Chairman Arthur Burns announced that he would tolerate "no credit crunch in our country." Now at long last the Fed's moves are beginning to show up in hard (or rather, softer) figures.

Having been hung up at a record 12% since early July, the prime interest rate--the rate commercial banks charge their most credit-worthy corporate borrowers--began to edge downward earlier this month. While several major banks (among them Chase Manhattan Bank and Manufacturers Hanover Trust Co.) currently peg the prime rate at 11 1/2%, many others last week followed the lead of First National City Bank in bringing the rate down another quarter-point to 11 1/4%--and Citibank itself cut further to 11%, the lowest since last May. Meanwhile, the Fed has been making some moves that suggest that Burns & Co. believe commercial rates should go even lower. The board has been allowing federal funds--the uncommitted reserves that banks lend to one another from one business day to the next--to trade as low as 9 1/2%, well down from the 13% rate that had been reached last July. The board was clearly encouraging a further drop in short-term interest rates, that is, the rates on certificates of deposit and commercial paper, as well as the prime rate.

Bond Drop. Yet many banks are holding the prime rate higher than it needs to be. After a year of chaos in the stock and bond markets, the nation's banks have become virtually the sole source of funds for cash-seeking corporations. Bankers hope that a high prime will encourage their corporate customers to again seek funds in the bond markets, where rates are falling even more sharply than they have been at the banks. The tactic is evidently working: this month corporations will try to raise an unusually high total of $3.4 billion through bond offerings. Many economists expect that as loan demand eases off, banks will gradually lower rates over the next several weeks.

Few analysts, though, foresee a prime rate below 10% by the end of the year. And after that? Some experts expect the rate to drift as low as 8 3/4% by next spring. But others are not so sure. First National Bank of Boston President William L. Brown states that "historically, base rates stay in the vicinity of two points above the inflation rate." By that yardstick, the annual rate of inflation would have to drop from its third-quarter level of 11 1/2% to about 8%, if the prime rate is to sink lower than 10%. And even a 10% prime would be no great bargain; it would still be twice as high as the rates that prevailed as recently as the spring of 1972.

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