Interest rates emerge as an election-year issue
Rising interest rates are fast becoming a major political issue this election year. Interest rates have marched up sharply in recent weeks, and economists expect some further boosts in the months ahead.Skip to next paragraph
Subscribe Today to the Monitor
The issue is politically charged: Rising rates could slow the economy and raise fears of another recession. At the same time, increases could cause the international debt crisis to flare up by increasing debtor nation's interest payments. The uptick in rates already has ravaged the bond market and depressed the stock market, thus affecting millions of investors.
In a speech last week, Republican pollster Robert Teeter predicted, ''This may be an interest-rate election.''
One reason is that, in the last two years, consumers have become much more sensitive to changes in rates ''than at anytime in the past,'' notes Sandra Shaber, a senior economist at Chase Econometrics.
The situation is especially delicate for the Reagan administration because the early effects of rising rates tend to be felt unevenly by various regions and industries. Among the first to be hurt would be key constituents like home buyers and farmers. Another early casualty could be the vote-rich industrial Midwest, which is tied to the interest-rate-sensitive auto industry, and the Pacific Northwest, which feels keenly any downturn in housing-related demand for lumber.
Interest rates moved to center stage last week when the White House began complaining about the Federal Reserve Board's monetary policy after major banks raised their prime, or benchmark, lending rate from 12 to 12.5 percent. It was the third increase in less than two months. And during a Treasury auction of new government securities last week, demand was weak and the yield on 30-year Treasury bonds surged to 13.32 percent, the highest level since February 1982.
President Reagan responded by telling a National Association of Realtors meeting last week that ''frankly, there is no satisfactory reason'' for the rate hikes. Presidential spokesman Larry Speakes charged that the Fed is ''obviously not accommodating'' economic growth by providing enough credit to the economy.
And Treasury Secretary Donald T. Regan on Friday said that if the Fed continued its current monetary policies, ''it could lead to the same thing that happened in 1981,'' when, he said, the Fed had ''slammed the brakes'' on the supply of credit and ''threw (the economy) into recession.'' He cautioned that a recession would not be triggered unless the Fed pursued its current course ''for months and months.''
At a meeting of the Business Council, a group of executives from the nation's largest companies, Fed Chairman Paul A. Volcker was asked whether the Fed can control interest rates. ''Not the way people seem to think we can,'' he replied, adding, ''I don't see any particular reason for (a recession) now.''
Meanwhile, administration economic experts still are not singing the same song on interest rates.
Martin S. Feldstein, who resigned last week as chairman of the President's Council of Economic Advisers, added to a string of policy disputes with Secretary Regan when he spoke to the Business Council on Saturday. He charged that the expansionary monetary policy Regan advocates was out of step with the President's views and would ''lead to an increase in inflation next year.''
He added that it would be ''a terrible mistake to try to push interest rates down by expansionary monetary policy,'' since financial markets would drive up interest rates to adjust for the expected increase in inflation.
While many private economists say the Fed recently has moved to tighten credit conditions, few say they believe that is the only reason interest rates have risen. They note that corporate demand for credit has been rising rapidly at the same time the government has been borrowing to finance a large deficit.
''The main thing that has moved rates as quickly as they have is the fact that loan demand has just risen very sharply as a result of a rapidly rising economy,'' notes an auto-company economist who asked not to be named. The recent brisk pace of retail sales, which rose 2.9 percent in April, leads some economists to expect continued pressure on credit and interest rates.
A panel of economic cosultants to the Business Council late last week predicted inflation-adjusted economic growth of 5.6 percent this year and 3.1 percent in 1985. The group's interest-rate forecast was for another half-point rise in 1984 followed by an additional half-point increase in 1985. But a minority of the group thought the prime would jump from its current 12.5 percent to 15 percent or more next year.
Robert Gough, an economist at Data Resources Inc., says, ''The prime rate will go to 13 percent by summer,'' and by Election Day will be ''easily'' a full point higher.