View from the Vaults

Following its philosophy of swimming against the business tides, the Federal Reserve Board moved to tighten credit slightly in two ways last week. First, it gave the Dallas Reserve Bank permission to follow San Francisco in upping its discount rate from 1 3/4% to 2%; the other ten districts are expected to come into line soon. Next, the Federal Reserve announced that it had reduced its holdings of short-term Treasury bills, bringing member banks' net free reserves, which had been around $500 million for five months, down to $403 million. Though the Fed's moves brought immediate talk of rising interest rates and a return to tight money, the actions were largely psychological, designed more to check the inflationary fever that has hit the securities market (see below) than to restrict credit itself.

Actually, the nation's banking system is in good shape for recovery without returning to tight money. Banks have plenty of credit available for businessmen. Despite the Fed's action, free reserves are well above $350 million, where bankers consider that credit begins to tighten. Though short-term interest rates have improved, most bankers expect the prime rate to hold at 3 1/2% for some time because there is still no big jump in industry's demand for money. Business loans, which dropped $1.8 billion in the first half of 1958, show only slight signs of picking up. Said one Manhattan banker: "There is still inventory liquidation, and business loans are still off. We anticipate that it will be next year before we can expect business loans to experience more than a seasonal rise."

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