Masonry Magazine March 1976 Page. 21
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INTEREST RATES WILL BEGIN EDGING UP AGAIN THIS SPRING. Economists in government and industry believe that the sharp rate declines of last fall are over. Officials are no longer trying to stimulate economic activity now that the recovery appears to be well launched and seems to be gathering significant momentum. Most of the analysts expect business' need for credit to materialize... finally... after many months of very weak loan demand. At that juncture, the Federal Reserve would begin to tighten money gradually.
To be sure, the interest-rate trend last year surprised the experts. Most money-market men were looking for higher short-term rates in late 1975. But they did not foresee the sluggish growth of the money supply. The economy was getting less money than in the past to finance its recovery.
As a result, the Fed loosened the credit reins to spur money growth. Treasury bill rates dropped from 6%% in September to below 5% in February. And the banks' prime rate slipped from 74% to 64% in the same period. But, in January, the slide came to an abrupt end. Worries at the Fed about the strength and staying power of the upturn faded. The latest business figures show a healthy, normal, cyclical upswing.
MOST BUSINESS EXPERTS EXPECT THE UPTURN TO ACCELERATE during 1976. including the Federal Reserve Chairman and the chief White House economist. They point out that consumer spending will continue to power the recovery, not directly, because the initial big surge in buying peaked at Christmas but indirectly now, as a trigger for investment in inventory and new plant.
The economy seems poised for a brisk inventory build-up, one that may start soon. Retail holdings confounded forecasts and fell during the fourth quarter of 1975. to some of the lowest ratios to sales ever. The run-offs must be replaced. Even more important, shelf stocks must be built up still further by stores, beyond replacement levels, to handle more sales.
THE BIGGER INVENTORIES WILL HAVE TO BE FINANCED, one way or another. For a while, internal-fund flows from big profit increases, for example-will meet corporate needs. But internal funds cannot do the job for long. Liquid assets will have to be sold. In time, hank-loan demand will appear. The sales of assets will serve to nudge rates up and so will loan demand.
BUT, IN THE END, THE FEDERAL RESERVE WILL DECIDE when rates start up. In today's climate, big jumps in the money supply are no longer all it takes to trigger a more restrictive monetary policy from the money authorities. Equally important to the policy-makers is the economy's tempo of recovery. Mild money growth and an accelerating economy could alone prompt tightening.
Thus, the upward move in rates will come whenever the Fed feels that the expansions in business and credit are strong.
MANY ECONOMISTS BELIEVE THE RATE RISE WILL BEGIN sometime this spring. They are forecasting a slow and gradual upcreep in interest rates in 1976- one that will continue at a steady pace for at least the rest of the year. Long-term interest rates won't drop much once short rates start climbing.
NO NEW CUT IN FEDERAL INCOME TAXES IS LIKELY TO BE VOTED this year-meaning individual taxpayers as well as for large and small businesses. This may sound very strange in an election year when both the White House and the Congress would normally be eager to give the voters such goodies. But the President tied his $10 billion in relief to cuts in U.S. spending. Only if Congress kept spending down would Ford favor additional tax cuts.
Congress isn't about to live with the limit on spending of $394.2 billion set by Ford in his Budget. This involves too many cuts in too many programs, especially in welfare.
THE LAWMAKERS HAVE ADOPTED A MORE CAUTIOUS STAND on Federal spending. They may actually pare some of the automatic increases in ongoing programs. But the legislators are not ready to go as far as the President would like. The Congress seems certain to author- ize spending of $405 or $410 billion or about $10 to $15 billion more than President Ford originally asked for. That is equal to or exceeds the amount of tax reduction he has proposed.
Congresss isn't likely to vote more spending and big tax cuts this year. And if it does, Ford will veto the tax bill and will probably be sustained. Many Democrats, anxious to escape a fiscally irresponsible label this year, will support him.
HEIRS TO CLOSELY-HELD BUSINESSES COULD GET a big estate-tax break. Congress may vote to help families continue to operate sound, small firms. There's concern about the many businesses liquidated to meet estate taxes. One proposed plan would double the size of the $60,000 estate-tax exemption. The current exemption has stood since 1942. with no inflation adjustment. President Ford has also proposed a bill to provide such estate-tax re- (Please turn page)
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