Of Climb, Crunch and Slump

Squeeze gave way to ouch last week as Chase Manhattan and Citibank lifted their prime lending rate to businesses from 9 3/4% to 10%, the highest since January 1975. Other banks are expected to follow suit. The action, reflecting a steady tightening of money by the Federal Reserve Board, substantially increases the risk of a credit crunch and a deeper economic downturn next year than most experts were forecasting a few months ago. The hike is certain to pull up other rates and dampen spending by boosting the cost of corporate loans and, eventually, of consumer borrowing.

In the past month the board has let the rate for Fed funds, uncommitted reserves that banks lend each other, rise from 8 3/8% to 8 3/4%. The Fed funds rate serves as a floor for most other short-term rates. Then last week the board increased the discount rate, the interest charged by the board for loans to member banks, from 8% to 8 1/2%, the highest level ever. A key motive for the Federal Reserve's money moves has been to halt a sharp and inflationary increase in the money supply. Also, the Fed is trying to forestall further dumping of the dollar on foreign markets; lower inflation and higher U.S. interest rates should make greenbacks more attractive to hold.

Yet the old medicine does not seem to be working. Loan demand so far has remained robust. That is one reason the money supply has expanded at an annual rate of 11.3% in the past two months, well ahead of the Reserve's target limit of 6.5%. Nor has the dollar shown any appreciable signs of strengthening. Thus many experts believe that even higher interest rates are on the way, even though Reserve Chairman William Miller has said that borrowing costs are at or near their peaks. Henry Kaufman, a top money analyst at Salomon Brothers, believes the prime rate could be as high as 12% in 1979. Economist Allen Sinai of Data Resources, Inc., figures on a recession if the prime rate reaches 11% and the Fed funds rate 10%.

Worried, President Carter and other Administration officials have openly criticized the Federal Reserve's policy. But until the White House comes forward with a workable anti-inflationary policy of its own, its protests are not likely to register. Next week the board's Open Market Committee meets -- and many experts would not be surprised if it tightens credit another tick.

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