• U.S.

Money: The Lift of Lower Rates

2 minute read

For the second time in two weeks and the fourth time this year, U.S. banks lowered their prime rate. The minimum annual interest charge to the most creditworthy corporate customers dropped from 7½ to 7%. The reduction was made not because of a new surge in the money supply—indeed, the supply remained fairly flat in October and November—but because of a weakness in demand for loans. Although the normal growth of the economy would call for a $1 billion increase in bank lending during the summer and fall, bank loans have actually declined by $3.5 billion since June. “Business-loan demand has caved in,” says Arthur Okun, former chairman of the President’s Council of Economic Advisers. “The economy is going nowhere, partly because of the General Motors strike. Corporations are paying off their short-term debt.”

As usual, the stock market got a lift from the rate reduction. Moving up on every trading day of the short Thanksgiving week, the Dow-Jones industrial average gained 20 points to close at 781, its highest in seven weeks. The bond market experienced one of the sharpest price rallies in decades. In two weeks, many investors have made paper profits of $45 to $50 on each $1,000 bond. Last week South Central Bell Telephone Co. brought out a $150 million issue of debentures yielding only 8.14% interest, the lowest on a long-term Bell System bond in more than a year.

Businessmen, local and state governments will benefit from lower rates, but consumers will benefit last and least. Home mortgage rates have declined only a minuscule amount from this year’s peaks, and now average about 81% nationwide. Lenders predict little change soon, among other reasons because it usually takes at least six months for mortgages to reflect changed conditions in the money market.

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