Masonry Magazine June 1971 Page. 11
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INTEREST RATES SEEM LIKELY TO BE RISING during the rest of the year. Indeed, the cost of short and long-term borrowing has already begun to firm. Continuation of the rate rise could slow the still-fragile economic recovery. Thus, the Federal Reserve System is now faced with a very difficult dilemma. Should it tighten money and risk choking off an only modest business upturn? Or, should it stay fairly easy and risk inflation and new currency troubles?
The "Fed" has already made two slight shifts away from the ease of 1970 and early 1971-shifts that surprised the money markets, upset their psychology, and stopped the recent decline in mortgage and other interest charges cold. The modest moves were prompted by a number of varied concerns.
THE FEDERAL RESERVE MAY HAVE BEEN TOO GENEROUS in supplying credit, for one thing. The money supply is growing at a rate considered unsafe for the long-term. Instead of an acceptable 5½% to 6% a year, growth has been 9% or 10%. The high money-supply growth may mean renewed further inflation.
Some private economists fear that money has in fact been made too easy that the economy is being over-liquified.
OFFICIALS ALSO WORRY ABOUT INFLATION. It is not slowing as hoped, despite repeated Nixon Administration assurance that progress is being made. The rise in wholesale industrial prices has speeded up the past few months. Some economists wonder what will happen when business acquires momentum, and businessmen try to capitalize on the firmer demand to pass on higher costs.
And wage increases still keep coming along at close to record rates. The 13½% increase given to striking railroad signalmen last month by the Congress, is one case in point.
Then, too, the balance of payments has been aggravated by dollar drains to Europe, caused by lower interest rates here, compared with those abroad. Last month's currency crisis angered foreign officials and cut United States prestige.
OFFICIALS WERE DISTURBED BY THE UNFORESEEN REACTION to their slight tightening by the way interest rates jumped. So they are moving carefully. They don't want to make a move that would send rates rocketing even higher. They know sharply higher rates involve the risk of a setback to the recovery.
But they'd feel more comfortable if money growth got back into balance. And they wouldn't hesitate to tighten rates a little more, to avoid further excessive money-supply growth.
NATURAL FORCES ALSO WILL BE OPERATING TO PUSH interest rates higher. A rise in money costs is typical when a business recovery regains momentum. People and businessmen want bigger bank deposits as they buy and sell more. And Treasury borrowing to finance the Budget deficit will be higher than '70, adding still further upward pressures in the short-term interest-rate area.
Business and government economists hope long-term rates won't go up much, as short rates rise. But they recognize that it will be hard to head off higher yields on bonds or mortgages.
EXPECTATIONS ARE PLAYING A POWERFUL ROLE in setting the rate levels. Investors have decided that a tight-money, high-interest rate era has begun. Many are holding off buying new bonds and are even selling off securities. Many businessmen have decided that now is a time to float corporate issues.
Bond yields have started to head upward again. After sharp declines earlier, they're headed toward their 1970 peaks.
THE TROUBLE IS THAT HIGH RATES CAN WEAKEN TWO PILLARS of recovery home-building and state-local spending. Both have given much to the upturn. Savers may rediscover the richer yields on corporate bonds already visible and begin diverting their funds away from the mortgage-lending institutions. The result: Home-building may be clobbered again, just as in 1966 and 1969.
State-local governments also could be priced out of the money markets. They would again have to postpone work on badly needed facilities, such as sewer and water plants.
EVEN MORE TIGHTENING MAY BE NEEDED; modest moves may not be enough. But choosing the right policy won't be easy for Federal Reserve officials. Political implications, besides pure economic factors, must be kept in mind. On one hand, the Fed must worry over the already high level of unemployment; on the other hand, though, officials must fight against still-rising prices.
The Federal Reserve is damned if it does try to tighten. But the money managers will also be damned if they don't.
THE ADMINISTRATION IS TONING DOWN its earlier economic forecasts. It concedes total output-Gross National Product-won't hit $1,065 billion. The President's economic advisers now look on this projection as a target.