Interest rates are normally an arcane subject, thought to be of passionate concern only to bankers and other financiers, and not fully understood even by them. Yet one way or another interest rates are paid by everyone who borrows money, which in the modern credit economy means just about everyone, period. Interest rates help to determine whether a business can hire workers, whether a consumer can afford his or her dream house, whether a farmer can plant seed. If they escaped the front-page headlines and the TV news in the past, that was because rates usually changed only slowly and by small amounts.
No more. In the past three years, interest rates have shot up higher than anyone could have imagined earlier, and they have suddenly become Topic A in the beleaguered American economy. The high cost of money has crippled the Administration's economic program and endangered President Ronald Reagan politically. Expensive and scarce money has begun driving homebuilders, auto dealers and businessmen from every walk of life out of business, and in such numbers that bankruptcies around the country are beginning to rival those of the Great Depression. The cost of money is crimping the investment that U.S. industry needs to make to become more productive. Sky-high rates are putting state and local governments everywhere in a financing bind, forcing up the cost of borrowing and driving down the ability to spend for schools, roads, sewers and just about everything else that people expect and need from the governments that serve them.
Worst of all. America's money miseries have become the ghoulish flipside to the Good Life. For cash-squeezed consumers by the millions, shopping on credit for everything from a new suit of clothing, to cars, kitchen appliances, even a roof over one's head, is increasingly painful. Indeed, by the common consent of economists, towering interest rates have done more than any other single factor to drive the U.S. into a recession that still threatens to push unemployment to a post-World War II high.
Now, at last, the rates are coming down—or are they? For the moment, the news is good. On Wall Street last week, lenders bid down some key short-term interest rates sharply. For example, the interest on six-month Treasury bills dropped to 12.7%, down about Y2 percentage points since mid-February. Also last week major banks across the country chopped their prime rate on business loans, the most important single interest rate in the whole financial structure, by half a point, canceling an increase posted only a week earlier. That leaves the prime at 16.5%, a full five points below its record high of 21.5% posted in mid-December of 1980.
But no one can rejoice very much so far. For one thing, it is anything but certain that the declines will continue. Pessimists in the financial community still expect rates, after sliding for a while, to turn around and march up past even their recent peaks—especially if the Reagan
Administration and Congress cannot trim menacing budget deficits. Moreover, some highly important interest rates have yet to budge the slightest bit. Standout example: the interest rate on long-term corporate bonds is hanging around 16%, a level that severely hinders investment. Few corporations are willing, or indeed even able, to