Recession brings a sudden drop in the high cost of borrowing money
With dramatic suddenness, America's interest-rate fever broke last week. The bench-mark prime rate, the interest that banks charge their best corporate customers, dropped from 20% only four weeks ago to 17%. The popular $10,000 six-month money-market certificates, which carried Golcondan interest payoffs of 15.7% only six weeks ago, were offering a mere 9.5%. Even mortgage rates took a tumble. California's Home Savings & Loan, the nation's largest thrift institution, dropped its home lending rate from 17.5% to 12.75%. Said Irwin Kellner, chief economist at New York's Manufacturers Hanover Trust: "Rates are following a financial version of Newton's law that for every action there is an opposite and equal reaction."
Though interest-rate temperatures were going down, the U.S. economy remained in intensive care. Inflation psychology, which had long led consumers to buy just about anything at any price because of fears that costs would keep rising, seems to have lost its grip. A public increasingly concerned about job security has begun to pull back at the check-out counter. Installment debt rose by only $1.4 billion in March, a 38% drop from the February rate; the consumer confidence index of the Conference Board, a Manhattan-based business study group, reached its lowest level since the 1974-75 recession.
There was a little good news on the inflation front last week. While wholesale prices rose 1.4% in March, they went up only .5% in April, the lowest monthly increase since May 1979. This should result in lower prices for consumers later in the year. But the nation's trade deficit hit a record $12.2 billion during the first quarter of 1980, largely because of higher-priced petroleum and metals imports. Lower American interest rates and a higher trade deficit pushed the dollar, which had shown surprising strength on international money markets until the past month, back down toward its anemic rates of last summer.
Some financial experts attributed the precipitous decline in interest rates to the Federal Reserve's apparent decision to ease its draconian policy of monetary restraint now that the recession appears to be taking hold. When the nation's money supply declined at an annual rate of 1.6% or $6.2 billion to $382.9 billion in the past three months instead of rising 5% as originally targeted by the Fed, economists thought the central bank might be ready to turn on the money tap once again. This seemed to be confirmed when the Federal Reserve announced that it was dismantling some of the credit control apparatus it had built in March. At that time, the Federal Reserve began charging major banks a three-point interest-rate surcharge on funds they borrowed from it; that levy was eliminated last week. There were also strong expectations that Washington might be preparing to discard the rest of the credit curbs initiated two months ago. Fed Chairman Paul Volcker had been opposed to the measures, which included reserve requirements on new credit-card borrowings and on money-market funds. Observers expected that Volcker would use the first available opportunity, like the recession, to get rid of the limitations.