Business: Turn of the Screw

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Tightening money last week sent the Federal Reserve discount rate to 4%—the highest level in 24 years. It was the fifth such increase since the Fed set the discount rate at 1¼% in the 1957-58 recession as an aid to recovery. In abandoning the 3½% level that had held since last spring, the Fed's purpose was to narrow the abnormal gap between the cost of Fed money to member banks and the rate at which the banks could lend money to their customers. After commercial banks upped the rate to their best customers from 4½% to 5% (TIME, Sept. 14), the interest spread rose to 1½%. Moreover, for several weeks the old discount rate was actually below the going market rate on U.S. Treasury bills, creating an opportunity for banks to borrow from the Fed and make a neat and riskless profit by investing in Government securities.

Behind the Fed's decision to follow the interest market up another half notch was concern over the ballooning of commercial loans, which have continued to rise despite downturns in loan requirements in industries affected by the steel strike. During the strike's early stages, the Fed delayed raising the discount rate for fear of adding to the effects of the strike on the economy. But as it became clear that the strike was not slowing the boom, the Fed began to worry over what will happen when the steel strike ends and steel users return in full force to the loan market. Many bankers think that an end to the strike, if not too long postponed, will create such a demand for money that rates may even take another jump before year's end.

Most businessmen do not think that the high cost of borrowing will choke off the boom. Corporate income taxes today trim the real cost of borrowing money by as much as one-half, with the result that the effective cost of borrowing money is still lower than at many other times in U.S. history. Moreover, a borrower who really needs the money is not likely to quibble about half a point.