Powered by rising corporate and consumer spending, the economy is zipping ahead faster than most experts had earlier anticipated. Alan Greenspan, a member of TIME’S Board of Economists, forecasts that the gross national product this year will expand by $101 billion—comfortably ahead of the Administration’s original goal. Next year, says Greenspan, the G.N.P. should do even better, increasing by $111 billion, to an awesome $1,263 billion or so. Sweeter still, Greenspan predicts that more than 6% of this year’s growth will be real and not caused by rising prices. Another board member. Otto Eckstein, puts the growth figure at $101 billion for this year and about $110 billion for next year.
That good news comes with a reminder that a vigorous economy exacts its price, part of which is upward pressure on interest rates caused by the surge in loan demand. Short-term interest rates continued to climb last week, making borrowing more expensive. Rates on commercial paper rose by as much as three-eighths of 1%, to 5%. Short-term Treasury-bill rates went up to 4.57%, the highest in almost a year, and in a move that other banks are certain to follow, New York’s First National City Bank raised its prime lending rate to businessmen from 5½% to 5⅝% .
Moderate Policy. Moreover, this fall the Treasury will have to start borrowing heavily to finance a ballooning federal deficit—a move that will help push rates even higher. Greenspan expects the deficit to reach $35.6 billion in this fiscal year, up from the Administration’s estimated $27 billion. Some economists expect that most short-term interest rates will reach at least 6% by the end of 1972. While this will most immediately affect corporate borrowing costs, within a year the trend could boost rates of small consumer loans and home mortgages.
The independent Federal Reserve Board is not expected to try to offset rising rates by pumping out more money, though President Nixon would like to see borrowing costs kept reasonably low until after the election. Despite some signs of monetary expansion in recent weeks, the board’s members, concerned about the dangers of greater inflation, will probably continue to hold to a moderate policy of feeding out just enough money to meet the needs of the economy. The biggest beneficiaries are the commercial banks, which have been borrowing heavily from the Federal Reserve. They pay the Fed’s discount fee of only 41% to borrow money but charge far higher rates to their customers. So far, the Fed has held back from lifting its discount rate, partly because it does not want to jeopardize the economy by giving the slightest impression that it is adopting a tighter policy.
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