Business: Battling the Inflation Bears

In the first burst of cheering over Jimmy Carter's save-the-dollar program, some football-fan bankers compared the President to a quarterback who had thrown a spectacular pass from his own 1-yd. line for a touchdown. Last week it became evident that the quick score only got the Carter Comets back into a game that had been turning into a rout. To win, Carter must now call signals effectively for a long, grind-it-out-on-the-ground drive against the awesome defense of the Inflation Bears.

Overseas the dollar came under selling pressure again last week and gave up some of the gains it had made early in the rescue program. The selling came primarily from exporters in various countries who played what New York Money Trader Claude Tygier called "a cat-and-mouse game" with central banks. Having acquired dollars by selling their products, the exporters sold some of those greenbacks in order to test whether the government bankers really were determined to support the price.

The U.S. Federal Reserve Board and the central banks of Germany, Switzerland and Japan did in fact buy up enough dollars to hold the price well above the lows established in the pre-Halloween panic. But it was clear that the dollar has not yet developed any upward momentum of its own, and will not until Carter can convince the hard-bitten cynics of the exchange markets that the U.S. is prepared to follow a tough anti-inflation policy as long as may be necessary. Said Walter Seipp, vice president of the Westdeutsche Landesbank in Düsseldorf: "Everything depends on whether the U.S. Government will succeed with its very tight money policy in reducing the American inflation rate and improving its trade balance."

At home the pain of such a policy became more evident. The Federal Reserve has been trying to contain an inflationary increase in the U.S. money supply by raising interest rates to near record levels, but it is still unclear whether the policy is succeeding. Money supply jumped $2.1 billion last week, wiping out more than a third of a big drop registered the week before. That means interest rates will probably have to move even higher than the 10.75% that banks now charge on "prime" loans to their best business customers—possibly above the record 12% rate of 1974. And when money growth finally does slow, bankers increasingly fear a credit crunch in which house buyers, small businesses and other would-be borrowers will find loan money not just expensive but unavailable.

Last week economists and Government agencies began filling in some numbers on just how severe a slowdown in growth-or how bad a recession-the high interest rates are likely to produce. Morgan Guaranty Trust Co., which had been predicting a 6% rise next year in business spending for new plant and equipment, adjusted for inflation, slashed its forecast to a mere 2.9%, a rise that would Create few new jobs. The Commerce Department predicted that total spending on construction will drop 6% next year, following a 1978 rise of 4% to 5%.