Wall Street and the White House
Wall Street has become oblivious to the rest of the world.Skip to next paragraph
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Budget deficits that concerned investors a month ago don't seem to count now. Fighting in the Middle East, which threatens vital oil supplies, is shrugged off. Ignored are splits in the pro-business White House over such issues as imposing sanctions on United States companies doing business with the Soviets against the President's desires.
Not even a gloomy economic forecast by Murray Weidenbaum, who resigned recently as chairman of the President's Council of Economic Advisers, could dampen investors' enthusiasm.
In an interview published Friday, Mr. Weidenbaum said last year's tax cut and the President's unbending stand to increase defense spending means the federal deficit really isn't being reduced. At one time, a statement like that would have set the bears on Wall Street growling. Instead, notes Monte Gordon, director of research at the Dreyfus Corporation, an investment management firm, Wall Street is riding ''a tidal wave of optimism.'' And every time the market rises further, the wave grows bigger as more investors, like eager surfers, try to ride it.
The wave last week again sent investors, awash with cash, on a wild ride. The Dow Jones industrial average jumped another 14.18 points, closing at 883.47.
Volume records continued to be smashed. In the past two weeks, more than 1 billion shares were traded, more than the total number of shares traded in all of 1960. Investors suddenly decided that investing in the stock market was preferable to going into short-term Treasury bills or other cash equivalents.
The reason Wall Street felt it could ignore budget deficits, Middle East problems, and splits within the administration is that interest rates have been falling sharply. At the end of last week, however, rates started to stabilize.
Even though the Federal Reserve Board lowered the discount rate - the rate the Fed charges banks borrowing money from it - a half of 1 percent to 10 percent Thursday, the bond markets generally shrugged off the move. Instead, notes William Sullivan, senior vice-president at the Bank of New York, the bond market dropped and yields rose. He pointed out that investors were watching the federal funds rate, which showed signs of inching above 9 percent. Federal funds are the excess reserves that banks have, which they lend other banks overnight.
These short-term rates are moving up, Mr. Sullivan believes, as the Fed tries to stabilize rates. ''The Fed is no longer in the process of easing,'' he says. He says he doesn't expect the Fed to further cut the discount rate in the near term. Nor does he expect a big rush by banks to drop their prime interest rates to 13 percent, from the current 131/2 percent. Instead, the Fed will wait to see how the economy responds to the influx of money already provided.
Investors also seemed to feel Washington had developed a grasp over its fiscal problems. For example, Wall Street didn't blink when Mr. Weidenbaum told the Associated Press that the President's insistence on huge military spending was wreaking havoc with the budget and the economy.