Business: CONTROLLING INFLATION: A LONGER TIMETABLE

• Share

(2 of 2)

Annual interest rates on Eurodollars have fallen to 11 % from a peak of 13% , which was reached for a day or two in the second quarter. U.S. banks had been borrowing huge quantities of such dollars on deposit in Europe in order to meet their loan commitments at home. Lately the banks' appetite for such deals has been declining. Of more immediate interest to consumers, mortgage interest rates have declined ever so slightly. Mortgages auctioned off to private investors last week by the Federal National Mortgage Association brought an average yield of 7.8%, down from a peak of 8.1% in early July.

The prime rate on loans to businesses by major banks remains at a record 8½%, but now bankers are talking of possible future cuts rather than further increases in the rate from which all other interest rates are calibrated. Gaylord Freeman, chairman of Chicago's First National Bank, goes so far as to predict that the prime rate may drop to 7½% or even 7% by year-end. Most bankers and economists are more cautious. They warn that interest rates could yet bounce up again. So far, though, demand has been dropping more than it usually does in the summer.

Fears of Recession. The big fear among bankers is that the Federal Reserve will misinterpret the decline in interest rates, which bankers regard as a sign that tight-money policies are succeeding in cooling the economy. If the Board instead concludes that lower rates signify that the nation's money supply should be tightened even more, the resulting squeeze on banks could have serious repercussions. Bankers are not alone in believing that, at the worst, additional tightening could provoke a recession. Raymond J. Saulnier, Eisenhower's last chairman of the Council of Economic Advisers, warned last month that "we are as close as it is safe to get to the outer limits of monetary and credit severity."

Federal Reserve Board Chairman William McChesney Martin recently told Congress that high interest rates are "not a goal" of the Board's policy. He implied that he would be happy to see the economy lose enough steam to let rates fall. Still, there is scant chance that the Fed will ease its squeeze on money any time soon, if only because price increases are proving so difficult to arrest.