Is the recent jump in interest rates a "spike", or a plateau? Last Friday, the Federal Reserve Board announced an unexpected jump of $4.2 billion in M-1B, a general measure of money supply. The Fed raised its discount rate to a record 14 percent, with a 4 percent surcharge for frequent borrowers --meaning commercial banks now have to pay more to borrow from the Fed.
The commotion was more than financial markets could stand. On Monday the prime rate took an unusually large 1 point leap to 19 percent. Yields on short-term Treasury bills jumped. The stock market took a graceful nose dive.
Are interest rates going to stay high? Have they just climbed a tree temporarily? What will happen to rate-sensitive businesses?
The "experts" aren't much help, because they are not in agreement.
"It's largely fear," says Leif Olsen, chief economist at Citibank. "There is no rational basis to this kind of behavior.
Mr. Olsen says credit markets -- made skittish by recent history's financial shocks -- react strongly to surprises such as the money supply figures and the discount rate hike.
The Fed's actions do raise the price banks pay for short-term funds. Is the jump in the prime explained by increased costs?
"Interest rates, for economic reasons, need not be as high as they are," says John McAuley, vice-president for economic research at Chemical Bank.
The majority of economists contacted by the Monitor said rates would not stay high in the long term.
"We're presently calling this a spike upwards," says Kevin Hurley, director of financial forecasting at Chase Econometrics.
For one thing, many economists believe demand for credit, unexpectedly strong through the end of 1980 and beginning of 1981, is softening.
Employment isn't growing, they say. Retail sales are weak. Housing starts are down.
There are glimmering signs of hope that inflation -- perhaps the most crucial upward pressure on interest rates -- is cooling off.
And short-term money supply figures are notoriously volatile. In the longer term, money growth figures probably are still within their target range.
But when asked when and at what level this "spike" will stop, economists either giggle or throw up their hands.
"We're in a spriral that's gotten out of line," says Dr. Leslie Alperstein, director of research at Bache, "I couldn't tell you where it will end."
And not everyone thinks it willm end.
When Henry Kaufman talks, people listen. And Kaufman, a partner in Salomon Brothers, talks about interest rates high enough to curl the pinstripes on a banker's suit.
On April 22, in a speech before the National Press Club, Mr. Kaufman said that inflation is "not about to be resolved," and that the government's fiscal policy is expansionary.
If we continue to rely on interest rates to stabilize the economy, he said, they may follow a "rocket trajectory."
Dr. Albert Wojnilower, in a Brookings Institution paper on economic activity, claims that the demand for credit isn't affected by rising interest rates. He concludes that financial market actions "appear to be influenced more by extreme and memorable events than by slow-moving processes."
If he's right, then a softening economy may be irrelevant --than most economist think.
If the spurt is short, there shouldn't be too much damage to the real economy.
"A 24 percent prime for three days is easier to take than a 20 percent prime for three months," says Tim Howard, an economist at Wells Fargo Bank.
But if it's long. . . .
Says Mike Sumichrast, chief economist for the National Association of Home Builders (NAHB): "I see no hope. I just came from a meeting, and it was terribly gloomy."
If interest rates persist, the housing industry "will plunge below 1 million annualized starts in a few weeks," says NAHB president Herman Smith.
The recent rate hikes will batter already-stunned savings and loan institutions. S&Ls lost a record $2.26 billion in net deposits in March, and sharp increases in short-term Treasury securities mean the institutions can offer higher rates to customers on six-month certificates of deposit.
In English, that means thrifts will have to pay more to attract money, further eroding their profits.
This week's rate rises won't help the auto industry climb out of its hole, either. But they won't directly hurt it.
Consumer loans aren't tied to the prime, in the short run, so they don't fluctuate week by week. They follow long-term interest rate trends. "For people to claim there's a month-to-month change is just incorrect," claims a Ford analyst.
Industry officials concede there is a psychological effect: Potential customers stay out of the showroom because they've read about the high prime rate. And to the extent fluctuating short-term rates erode a customer's total finances, they do affect auto sales.