Business: Controls on Buying?

The Federal Reserve Board last week approved a discount-rate hike from 2% to 2½% for five of its district banks, but for reasons that had little to do with the threat of inflation. The hike was not designed to tighten credit, explained the Fed, but to bring the central bank rate in line with other short-term rates. Reason: the average yield on Treasury bills has been running three-quarters of 1% above the Fed’s 2% discount rate, making it possible for commercial banks to borrow from the Fed at 2% and invest in Treasury bills that pay nearly 3%. By narrowing the spread, the Fed hoped to stop the practice.

But the Fed nonetheless showed concern about inflation by pointing a finger at credit as the great danger. “Selective”‘ consumer credit curbs might have to be imposed, warned Fed Vice Chairman C. Canby Balderston in Manhattan, if auto and mortgage credit are “radically” loosened. Balderston placed part of the blame for the recession on the $5.5 billion credit expansion in 1955, which, he said, caused companies to overexpand. He said that the danger of another credit burst “might create a widespread public demand for consumer credit controls as an alternative to enhanced cyclical fluctuations or to an increased degree of general credit restraint.”

The facts hardly supported Balderston’s fear of a credit burst. Consumer credit has held fairly steady this year (see chart), as consumers cautiously kept from stepping up credit buying. Furthermore, payoffs have been good; the Veterans Administration reported last week that veterans holding G.I. home loans have set a “remarkable” record by paying off some $11 billion in home mortgage debts.

Many a businessman felt that what really should worry the Fed is that credit may be getting too tight too soon. A report from the Federal Reserve Bank of Philadelphia last week found that the nation’s banking system is considerably less liquid now than it was at the start of the 1955-57 upsurge; thus banks have less money for loans. The effects of tighter money are already appearing in housing: the Federal Housing Administration reported that hundreds are starting to trim their plans for houses.