Paul Volcker Superstar

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Whatever happens to interest rates will have an impact on Wall Street. The stock market's bull market of 1982 was set off when the Open Market Committee voted last August to ease Committee policy, and the market has been reacting nervously to rumors of higher rates. Investor fears that Fed tightening would boost interest levels caused the Dow Jones industrial average to drop 14.92 points last week, to close at 1192. The Reagan Adminstration, which fears that tight money could brake the recovery, has been making some clumsy attempts to influence the Federal Reserve's policy on interest rates. White House Spokesman Larry Speakes said last week that the Administration opposes any increase in the discount rate, which is the interest the Fed charges on loans to its member banks. A boost in the rate, which has been at 8½% since January, is unlikely, however, because it would indicate a strong shift in policy. Concedes a Fed official: "Nobody wants to send a signal of a tough new policy. At least not at this time."

Some key interest rates have started moving up in recent weeks (see chart). The level of three-month Treasury bills has climbed from 8.2% to more than 9% since May. The average cost of a home mortgage has risen from 12.6% to 13.3% over the same period. Asserts Harry Pryde, president of the National Association of Home Builders: "The housing-led recovery is in imminent danger of collapsing."

Interest rates are actually being pushed up mainly by heavy Government borrowing to finance huge budget deficits, which could reach $220 billion this year, rather than by the Federal Reserve's attempt to slow economic growth. The Treasury tapped credit markets for $41.5 billion during the second quarter, an unprecedented amount in a normally slack period. The Treasury borrowed just $11.7 billion in the second quarter of 1982.

The deficit will remain a stubborn obstacle to holding down interest rates. "You can't talk of monetary policy in a vacuum without reference to the enormous debt level and to the responsibility of Congress and the President," says Harry Freeman, a senior vice president of Shearson/American Express. "Volcker is being asked to keep interest rates down when he only has part of the action." Congress continues to fail to cut the fiscal 1984 budget deficit below the projected $180 billion. The Senate last week approved funds for the B-1 bomber and chemical-weapons systems. The House passed a new $15.6 billion housing authorization that will maintain the spending level of existing programs. Meanwhile John Chapoton, Assistant Treasury Secretary for tax policy, predicted that Congress will be unable to pass any substantial tax increases in the next two years.