Washington — Wall Street has jumped over the moon.
On a wild upsurge, the Dow Jones industrial average rose Aug. 17 by 38.81 points to 831.24, the highest increase ever recorded on a single date.
The next day, Wall Street set yet another record - the stock market traded 132.7 million shares, the highest volume ever bought and sold in a single day. Prices did not continue up, however. The Dow - the customary market indicator - leaped 18 points during the afternoon, but actually lost 1.81 points by the end of the day.
Something is happening but nobody seems certain just what.
Ironically, this state of affairs is just the kind of bull market that President Reagan hoped to encourage last year when he first introduced his Kemp-Roth, supply-side, three-year tax cuts. In April 1981, indeed, the market hit a high of 1024 but subsequently nose-dived to below 780. In terms of paper values, this meant a loss of one-fifth or more of the supposititous purchasing power.
Neither Wall Street, the administration, nor economists know what is happening now. The general explanation for the economy's past performance is that high interest rates and the excessive cost of borrowing money (to build houses, to erect factories, and to hire workers) dampened the recovery. Unemployment now stands at 9.8 percent, which means approximately one worker in every 10 is idle. Recession is worldwide.
The good news is that interest rates are coming down. Interest rates are the business of the Federal Reserve System, which calculates economic factors and comes up with a figure to control the rate by which key banks may borrow money. This, in turn, is translated to the interest rates on banks as a whole.
Some politicians would shorten this process: Democratic House majority leader James C. Wright Jr. (D) of Texas, for example, blames the Fed for the high interest rates and would simply pass a law ending its rate-fixing authority.
Representative Wright's opponents say this would remove the dam that holds back inflation. Mr. Reagan has agreed with Fed chairman Paul A. Volcker that the way to bring down interest rates is to cut federal deficit-borrowing. That action supposedly would ease the competition for credit in the marketplace.
But why the stock market surge now?
The Fed seems to be sending signals that it believes the inflationary danger is less serious, and accordingly, it has reduced interest rates. From the beginning, Reagan has emphasized the need for investor confidence and stressed his administration's success in lowering inflation rates. In one of the most dramatic episodes of recent times, Wall Street is influencing current politics - in the administration's view it seems to be casting a vote in favor of Washington's efforts to reduce federal deficits and balance the budget.
There is a twist to this reasoning, however. Some on Wall Street argue that interest rates are coming down because the economy itself is declining. Demand for credit is slackening, they assert. The Fed apparently thinks it is safe to lift the foot a little from the brake pedal.
Reagan has a more optimistic view. Things are improving, he argues, and recovery has come out from behind its corner. Passage of the tax bill, he hopes, will push things along. He's staking his political future on it.