Money: costly, hard to get for rest of 1980

Interest rates may have peaked in the United States. But don't count on finding your local banker all smiles and eager to make loans. "For the average guy," investment banker H. Erich Heinemann says, "money is going to remain very expensive and hard to get for the remainder of this year and early next year."

Indeed, some 40 business economists surveyed by Blue Chip Economic Indicators of Sedona, Ariz., earlier this month were on average predicting that short-term interest rates will still be running around 12 percent in the last quarter of this year and long-term rates about 12.7 percent at that atime. Considering that these economists are also expecting the economy to be deep in recession at the end of the year, those rates are extraordinarily high.

In other words, mortgage money won't be cheap. Not will car loans or other consumer loans.

In fact, Morgan Stanley & Co.'s Mr. Heinemann is among a minority of money market experts who suspect that interest rates may not yet have peaked. With the recent softening of retail sales, he theorizes, businessmen may face an unexpected buildup of inventories in the current quarter which must be financed. The extra demand for money, he says, could result in the prime rate -- the interest commercial banks charge their most creditworthycustomers -- rising as high as 21 percent.

Mr. Heinemann cautions, "Very precise forecasts of interest rates prove nothing but that the forecaster has a sense of humor."

Whatever, interest trends in the last week show that the majority of participants in the financial markets figure that interest rates have already topped off. On Wednesday, for instance, Chase Manhattan Bank trimmed its prime rate to 19 3/4 percent from 20 percent. Two small banks had taken similar action last week. But this was the first giant bank to trim this key interest rate. It set off a sharp rally in the stock market.

Short-term interest rates have also been trending downward. On Tuesday, for instance, they dipped some 3/8 of 1 percent as the evidence of a recession piled up. This decline was especially strong in the market for bank certificates of deposit. Interest on six-month CD's feel to a bid of 16.35 percent from 16.70 on Monday.

Though those wanting to get a loan may rejoice in lower rates, savers will have to scramble to tie down today's historically high interest rates, the experts figure.

However, the decline in rates will probably be jagged and not precipitous.

One reason for such an uneven pattern, warns Allen H. Meltzer, a professor of economics and social science at Carnegie-Mellon University, Pittsburgh, is the probability of some major failures of banks, savings and loan associations, mutual savings banks, or industrial corporations as a result of the credit squeeze and recession.

For example, if Chrysler goes under, it could put a number of banks "in serious liquidity restraints," he says.

Some major concerns could also fail abroad in West Germany or elsewhere, he notes.

Any sizeable bankruptcy here or abroad "would set off some kind of panic in the money market" and shove up interest rates temporarily.

Another factor that could maintain relatively high interest rates in business demand for money, Dr. Meltzer notes. Commercial banks have made some $300 billion in unused loan commitments to business, it has been estimated. If only 25 percent of these commitments were actually used, it would mean a substantial rise in demand for money and in interest rates, he says.

A third reason for the stickiness of high interest rates is the widespread expectation that inflation, though it should come down, will remain bad for years to come. This particularly hits long-term interest rates where lenders figures they must obtain high yields to offset inflation.

"The inflation premium is not going to come out easy," comments James Lothian , an economist with Citibank, New York.

He points out that in previous recessions interest rates dropped lower than justified by subsequent inflation rates. "Eventually people catch wise," he said.

Mr. Lothian guesses that the interest rate on a high quality utility bond (AA) might drop to 10 percent next year from 14 percent currently.

The recent drop in interest rates stems from several factors, the experts say:

* The increasing conviction that a recession has arrived.

It may be dated as starting in March, says David M. Jones, an economist with Aubrey G. Lanston & Co., a firm specializing in US government securities. Retail sales dropped 1.3 percent in March. Industrial production declined 0.8 percent in the same month. The housing industry is depressed.

* The rate of inflation should soon decline.

Already commodity prices have broken sharply. This trend should in some months reach industrial and then consumer prices.

* Confidence in the Federal Reserve System has returned.

The Fed has succeeded in keeping the growth of money -- a key factor in reducing inflation -- within its targets. "Volcker [Fed chairman Paul A. Volcker] and the other policymakers have established their credibility," Mr. Jones says.

That means the Fed could tolerate a reduction in interest rates without damaging its anti-inflation battle.

On the foreign exchange markets, the decline in interest rates has weakened the US dollar. Much foreign money has been flowing into the US, attracted by the high returns available. The expectation of lower interest rates makes that option less desirable.

Bond owners will be especially pleased by declining interest rates. It has been estimated that in the bond market debacle of this winter as interest rates soared to record highs, individuals and institutions had paper losses on their bond holdings of as much as $700 billion. But only a small portion of these losses was actually realized by the sale of such low-interest bonds at depressed prices.

Any such realized losses could hit pension benefits or boost life insurance costs and otherwise hurt the "little guy on the street," as Morgan Stanley's Mr. Heinemann noted.

For business, the debacle practically halted the sale of bonds as a way for corporations to raise money. Now with interest rates declining, that market should gradually reopen to new bond issues.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK