FISCAL: Free Market Tremors

With the dropping of support by the Federal Reserve System, long-term Government bonds last week slipped below par for the first time since 1939. The tremors in the bond market had the usual effect; they spread to the stock market, already queasy because of selling to pay income taxes, and set off the stock market’s worst break of the year. In three days the Dow-Jones industrial average dropped 8.07 points to 243.95, lowest since January.

The tremors were not lasting. FRB decided to support the bond market again and it firmed up. By week’s end the stock market had also managed to gain back more than half its losses.

Most Government bond traders were still mystified as to just how free the bond market would be under the new policy. Last week’s action indicated that FRB will support the market at least partially whenever bonds drift very far below par.’ And those Government seers who had predicted dire things if FRB stopped supporting U.S. bonds above par, had been proved wrong.

FRB also moved to tighten up bank credit in another way. It announced a twelve-man Voluntary Credit Restraint Committee (four members each from insurance companies, commercial banks and investment banks), to try to get all big U.S. lenders to clamp down on loans not vital to defense, thus help check inflation. Few expected this to be very effective in actually reducing business loans (which in New York last week soared to a new high of $6.7 billion); but FRB wanted to make he gesture before resorting to new compulsory restraints.