Political Interest

For almost a year, officials of the Nixon Administration had been forecasting an imminent drop in interest rates--and encountering growing skepticism. By mid-March, Treasury Under Secretary Charls Walker resignedly told the Senate Finance Committee: "It's just like the Long Island Rail Road--if you wait for the train long enough, it's bound to arrive." Last week it finally did. New York's Irving Trust Co. led major U.S. banks in cutting their "prime" business-loan rate by half a point, to 8%.

The White House immediately declared that President Nixon was "pleased." Well he might be. The cut is an important sign that his economic policies are leading to something more politically appetizing than the combination of rising unemployment and continued price increases that has pinched consumers and worried Republican leaders.

More and Less. The cut reflected two factors. The business slowdown that the Administration has engineered in order to fight inflation has at last begun to reduce corporations' loan demands. Also, the Federal Reserve System, after many months of holding growth of the U.S. money supply to zero, has recently begun pumping some new funds into the economy. Arthur Burns, appointed by Nixon to head the Federal Reserve, has been encouraging a relaxation of the credit tourniquet since he took over in February. Even before the prime-rate cut, the combination of more money available and less demand for it began to reduce some short-term interest rates.

The prime-rate cut should speed this movement. The rate is one of the most important in the money markets. Although only the biggest and most creditworthy U.S. corporations get the prime rate, other business-loan rates are keyed to it, and it affects some nonbusiness loan charges too. Many pension funds, for example, lend to their members at a point or two above the prime rate. It also has great psychological importance as a closely watched indicator of credit tightness or ease. When it fell last week, rates also dropped in the bond markets, and buyers crowded in. Stock market investors, who have also been hurt by the credit pinch, greeted the prime-rate cut with a surge of buying that pushed the Dow-Jones industrial average up more than 16 points, its largest one-day gain in two years.

That euphoria may prove to have been overdone--as the stock market seemed to realize the next day, when prices barely moved. Though credit is easing, the Federal Reserve is unlikely to permit it to expand very rapidly. Interest rates on mortgages and consumer loans are unlikely to drop much for a long time. For the economy as a whole, the twin dangers of continued inflation and recession remain.

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