Price and Pride in D.C.?

In his drive to pep up the dawdling U.S. economy, Jimmy Carter will face at least two major challenges: prompting more investment by edgy businessmen and forging a working relationship with Arthur Burns, conservative chairman of the independent Federal Reserve Board, which controls the nation's credit. Last week Carter's prospects for doing both brightened measurably. After an hour-long meeting in Washington with Burns, the President-elect reported that the chairman found his economic goals for 1977 "reasonable." Those goals are a 6% rise in real output, v. 3.8% in this year's third quarter, and a reduction of 1 1/2 points in the unemployment rate, currently 7.9%. More important, Burns helped to engineer a further drop in interest rates that should please Populist Carter--and make it easier for businessmen to borrow for expansion.

Still Weak. The drop involved both short-and long-term rates. Two of the nation's ten biggest banks have now cut their prime rate on business loans by a quarter-point, to 6 1/4%--the lowest since February 1973. The rate on 90-day Treasury bills last week slid to 4.6% from 4.8% the week before, and General Motors Acceptance Corp. trimmed slightly the interest rate it pays on commercial paper (corporate lOUs) that it buys. Heartened investors flocked into the bond market, bidding prices up and interest rates down. For example, Cleveland Electric Illuminating Co. sold $125 million worth of 35-year bonds at an 8 1/4% yield, the lowest rate on a utility issue of similar quality since February 1974.

One reason for the declines is somewhat ominous: business loan demand is still weak. Between January 1975 and last September, the volume of business loans made by major New York banks fell 21%, the largest and longest-lasting drop since the 1930s. The Government estimates that real capital spending --business outlays for new plant and equipment, discounted for inflation --this year will be only 2.5% higher than in 1975 and almost 10% below the peak of 1974.

Another reason that interest rates are dropping is that the Federal Reserve has acted to push them down. Despite Chairman Burns' repeated public calls for economic restraint, the board has been pursuing a relatively easier monetary policy since last summer. Two weeks ago, it decided that stronger action was needed. The board cut the discount rate--the fee that it charges on loans to member banks--from 5 1/2% to 5 1/4%. It also apparently lowered its targeted interest rates on "Fed funds"--the uncommitted cash that banks lend one another--by a quarter of a point, to 4 3/4%. The effect of both moves is to make more money available for bank loans, which tends to bring down other interest rates.

The actions indicate that Burns, like Carter, is worried by the persistence of the lull in the business recovery and strengthen hopes that the two can avoid an outright clash over economic policy. Speculation that they might be on a collision course arose shortly after the election, when Burns warned Congress that stimulation of the economy risked speeding up inflation. But Burns was careful not to come out flatly against the tax cut that many of Carter's economic advisers want. Lately he has been passing the word that he might eventually back a cut if the economy continues to be sluggish--though he would prefer a permanent tax reduction that would benefit corporations as well as individuals, rather than the one-shot rebate on 1976 individual income taxes that some Carter advisers favor.

Certainly the potential for conflict remains. Early in his campaign, Carter criticized the Federal Reserve for being too stingy in doling out money and credit, and he has proposed making the terms of future Federal Reserve chairmen coincide with the terms of Presidents--a none-too-subtle indication that he believes each President should have a chairman who is philosophically compatible. But Carter cannot appoint a new chairman to succeed Burns until January 1978, and he knows that his plans for economic expansion will fail unless Burns and the board pump enough money into the banking system.

Burns, for his part, recognizes that it would be political madness to try to foil the wishes of a new President backed by an overwhelmingly Democratic Congress. For example, if Burns tried to counteract the effect of a tax cut by throttling back expansion of the U.S. money supply, he might not get the other six Federal Reserve governors to agree--and even if he did, he would practically be inviting an outraged Congress to take away the Federal Reserve's cherished independence. One newspaper cartoon pictures Burns and Carter as a Washington version of Price and Pride, A. &P.'s smoothly complementary TV pitchmen: Burns presumably cautioning the proud Carter not to jazz up the economy so much as to make the inflationary price unacceptable. That may be overstating the prospects for harmony, but the two men at least realize that for the next year they will have to try hard to get along with each other.

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