Interest-rate uncertainty tests US

Another economic factor causing uneasiness in US - a ballooning trade deficit The White House and Congress would do well to note what happens when uncertainty grips the financial markets.

A sudden plunge in the stock market, an upward tick of interest rates - these are signals that the investment community, uneasy about the future, is taking protective measures.

President Reagan could erase one uncertainty by announcing whether or not he will reappoint Paul A. Volcker as chairman of the Federal Reserve Board. Mr. Volcker's current term ends Aug. 5.

White House dalliance on the issue leaves money managers, both here and abroad, uncertain about the future course of Fed policy.

The President has not yet decided on a choice of chairman, White House spokesman Larry Speakes said Wednesday. He confirmed that Mr. Reagan and Mr. Volcker met privately at the White House Monday and that the chairmanship issue was ''briefly'' discussed.

A wider concern, and one more difficult to allay, is a growing perception among lenders and borrowers that interest rates are on the way up.

Uneasiness over interest rates contributed to an abrupt sell-off of stocks on Wall Street Tuesday, dropping the Dow Jones average to its biggest one-day loss since it fell 21.87 points on May 2.

Prompting the decline was a mixture of fact and rumor. First, the interest rate on government-backed home mortgage loans was boosted from 11.5 to 12 percent, to keep it in line with a nationwide rise in mortgage rates.

Rumors then swept the market that the Federal Reserve Board might raise its discount rate in an effort to slow down the rapid growth of the nation's basic money supply. The discount rate is the interest charged by the Fed on loans to member banks.

Though the rumor was not substantiated, the fact remains that the surge of the M-1 money supply figure, which measures cash in circulation and checking accounts, threatens to revive inflation if it is not checked.

The mortgage rate increase announced by the Department of Housing and Urban Development was widely lamented by spokesmen for homebuilding and real estate interests.

''The pent-up demand for housing was partly satisfied by the drop in rates from more than 17 percent to about 12.5 percent,'' said Kenneth Kerin, vice-president for research of the National Association of Realtors.

But to tap the next great pool of potential home buyers, Mr. Kerin said, the average mortgage interest rate would have to drop below 12 percent. Instead, the rate is climbing and now averages more than 13 percent.

''This leaves a great many Americans unable to afford housing,'' he said, and clouds the nascent housing recovery.

The money supply dilemma perplexes not only Federal Reserve officials, but divides economists on what measures the nation's central bank should take.

Volcker and his fellow governors insist they will allow the money supply to grow sufficiently to accommodate economic recovery - if that can be done without reigniting inflation. Where to draw the line is the problem.

To tighten the monetary screws too quickly would boost interest rates and could stall the recovery. Yet a market perception that inflation is on the way back would also drive up interest rates, as lenders tried to protect themselves over the life of their loans.

The Fed, meanwhile, is under pressure from Congress to switch its emphasis away from monetary growth targets to defining, and then achieving, those rates of interest that would allow the economy to grow in a noninflationary way.

This approach is embodied in the Balanced Monetary Policy Act of 1983, sponsored by House majority leader Jim Wright (D) of Texas, House Banking Committee chairman Fernand J. St Germain (D) of Rhode Island, and more than 100 other members.

Another high-ranking Fed official said enactment of the Wright plan would be ''absolutely unworkable. The real interest rate that matters is the difference between the nominal rate and the expected rate of inflation over the term of the loan. We simply don't know what that would be.''

Enactment of the Wright bill, said another high-ranking Fed official, ''would be a disaster. It is hard to determine what a real interest rate should be, or will be, at some time in the future.''

''You can't control both interest rates and growth of the monetary aggregates (money supply),'' he added. ''If you concentrate on one, you lose control over the other.''

You've read  of  free articles. Subscribe to continue.
QR Code to Interest-rate uncertainty tests US
Read this article in
QR Code to Subscription page
Start your subscription today