Change in Policy

After 2½ years of tramping hard on the nation's credit brakes, the Federal Reserve last week lifted its foot. FRB Chairman William McChesney Martin Jr. and his board approved a cut in the discount rate from 3½% to 3% by Federal Reserve Banks in New York, Richmond, Atlanta and St. Louis. The remaining eight districts were expected to follow soon. Next day the stock market reversed its bearish decline of recent weeks (see below), and U.S. businessmen everywhere breathed a sigh of relief.

Under different circumstances the Federal Reserve might have chosen some less spectacular method, such as open-market operations to increase bank reserves and ease credit. It chose a flat cut in the rates it charges member banks on loans as a dramatic signal to businessmen that it has changed its policy. The increasing worry of economists is not the state of business itself but the businessman's view of business, which has turned alarmingly sour in recent months. Said White House Economic Adviser Gabriel Hauge: "Business is better than business sentiment." And for this lack of confidence the Federal Reserve has largely itself to blame.

Barks from the Fed. Concentrating on the very real dangers of inflation, FRB Chairman Martin and his experts barked so long and so loud that they sounded as if the Federal Reserve was determined to keep credit tight come what may. Only a fortnight ago Chairman Martin preached harshly about inevitable declines (TIME, Nov. 18). As it turned out, says Martin, "I talked too long"--meaning he may have laid it on too thick. Now Martin, who is no man to overstay the market, finally agreed with many businessmen that the risks of deflation outweigh the problems of inflation. He wants the U.S. to understand that just as the Federal Reserve carefully--and correctly--set out to pinch the inflationary bubble off the boom, so it also stands ready to ease credit to help prevent a slide into recession.

What touched off the Fed's rapid shift were many of the same mixed signs of advance and retreat apparent for months in the U.S. economy. The differences were in degree. Instead of the expected seasonal rise, overall industrial production slipped another notch in October to 142 on the Federal Reserve's index, two points below September and four points below October 1956. While nondurable goods held steady, steel, producers' equipment, construction materials and autos all were down, although much of the auto drop was due to the model changeover, and the Fed itself noted that November production schedules indicate a "marked recovery." Bank loans to business were also down in October to a total $31.3 billion, a decrease of $796 million since midyear v. an increase of $1.2 billion in 1956 during the same period. The climb in the cost of living was also slowing down. Still another factor was personal incomes: down $1 billion between September and October to an annual rate of $345.5 billion, though still 3½% higher than October 1956.

Help for the Treasury. To balance the bad news, the lagging housing industry seemed to be coming out of its slump with construction rates for the past months at 1,000,000 homes annually, up from the low of 930,000 units reached last winter. Last week the Government also forecast a record outlay for overall construction in 1957.

For businessmen, the lowering of the discount rate will not automatically make more money available for loans, though some financial men expect the Federal Reserve to take steps to do so. But with the demand for money easing, the cut should start other interest rates down, make borrowing easier and cheaper. One man who should benefit is Treasury Secretary Robert B. Anderson, who must refinance $10 billion worth of 3-5/8 certificates and raise another $1 billion in new cash this month. Last week, preparing to announce the terms of the offering in a tight-money market, Anderson was prepared for the worst. But with the Federal Reserve's action, he postponed the offering and now hopes to borrow at more favorable rates.

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