The Economy: An Unmistakable Signal

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THE ECONOMY

The U.S. economy collected a surprise dividend last week from its new burden of higher taxes. In a move that most moneymen had not expected for weeks or even months, the Federal Reserve Board lowered its discount rate from 51% to 51%. Though the 1% change was as small as the Reserve Board ever makes it, it was an unmistakable signal of a general trend toward lower interest rates on all kinds of loans.

The reduction dropped the economy's key interest rate below the crisis level, highest since 1929, to which the Reserve Board pushed it last April in its effort to fight inflation and steady the international standing of the dollar. The new rate applied initially only to the Minneapolis Reserve Bank, which requested the cut in the amount it charges member commercial banks for borrowed funds. Normally, the other eleven district Reserve Banks soon fall into line with such shifts, but this time there were signs of dissent and delay. The key New York Federal Reserve Bank, which frequently takes a more conservative view of monetary matters than the Washington board, let word leak out that it was miffed at the timing. By week's end, only the Richmond Reserve Bank had followed Minneapolis' lead. Still, few if any bankers really expected the holdouts to persist over a very long period of time.

Dwindling Pressures. By its 5-0 vote to cut the discount rate, the Reserve Board sided with Administration economists who contend that inflationary pressures in the economy are dwindling because of the 10% income-tax surcharge enacted in late June. Unless the credit brakes were eased, so their argument ran, the combination of both fiscal and monetary restraint could slow the economy too much and create the risk of a mini-recession. To offset such economic drags as a sharp drop in steel buying, a leveling off in defense outlays and the anticipated decline in consumer spending, the Administration counts on a major rebound in housing construction. Yet despite a huge backlog of unfilled demand for new housing, the result of the 1966 credit squeeze that crippled the industry for a year, no such upturn seems likely unless interest rates continue to fall.