Wall Street and Fed stand back to back on interest rates
Henry Kaufman and Paul Volcker are at it again.
Mr. Kaufman, Wall Street guru and senior partner at Salomon Brothers, is just back from a trip to Venice, where he told Europeans on May 20 that long-term interest rates will rise to record levels either later this year or in 1983.
On May 27 Mr. Kaufman reiterated his position to his bond salesmen at the same time as Mr. Volcker, chairman of the Federal Reserve Board, was telling a news conference in Vancouver, British Columbia, that he doesn't believe it is inevitable that interest rates will rise as the economy recovers.
To Wall Street, it's a classic match-up. Comments Ron Anderson, a vice-president for Fidelity Management & Research, a Boston-based mutual fund, ''What we have here is two different schools of analysis, reaching fairly different conclusions.'' And, Monte Gordon, director of research at the Dreyfus Corporation, a mutual fund, says the battle has weakened the stock market, by sapping investors' confidence. If interest rates move back up, investors will find little reason to plow money into the stock market.
Mr. Kaufman, who has long been known as an ''interest-rate bear,'' analyzes the credit markets through the expected demand by the public and private sector for funds. He reasons any pickup in the economy will cause a collision on Wall Street between the demands of a money-hungry government and the cash-starved private sector. The end result will be rising interest rates.
Mr. Volcker, on the other hand, notes that inflation rates have fallen, and he believes interest rates should come down as well. The private sector, he believes, will see profits improve, easing its need for funds. Thus, later this year he expects interest rates to drop.
According to Mr. Gordon of the Dreyfus Corporation, Mr. Kaufman's forecast is gaining more credence on Wall Street. ''More people are giving it careful thought, rather than dismissing it with a wave of the hand,'' he comments.
Walter Peters, who runs the Unicorn Group, managers of pension funds, says he believes there is some validity to Mr. Kaufman's views. ''I think it is inevitable that there is going to be a collision,'' he states. But he adds, ''I'm not sure at what speed it will occur.'' An important consideration, the pension fund manager says, is where the economy will be when the collision takes place.
At Manufacturers Hanover Trust, Marc Goloven, vice-president and economist, says the bank is leaning toward Mr. Kaufman's interpretation as well. ''Our expectation is that, once the economic recovery gets underway, we will see this collision.'' He notes that the Federal government in the third quarter will have to borrow $50 billion and in the fourth quarter (the government's fiscal first quarter), the government may have to borrow a great deal more. Such borrowings, he reasons, will choke off any economic recovery.
Mr. Anderson at Fidelity says he, too, is leaning toward Mr. Kaufman's views. However, he doesn't believe short-term interest rates will reach the 20-percent level again, or that long-term rates will peak out at the 16-to-17-percent level again. The recession is not yet over, he believes, and this will help to moderate the rise in interest rates.
Mr. Kaufman, in his Venice speech, said businesses would have to cut their capital-spending plans soon unless interest rates start to fall. When this spending contracts, he said, ''more room will be available to finance the record federal budget deficit, but at the expense of draining the vitality from the economy.'' Thus, he concluded, interest rates would rise in the second half of this year or early in 1983, sparking a confrontation between public and private financing needs. Once Mr. Kaufman's ''market confrontation'' takes place, he believes interest rates will drop, ''beginning either late this year or in early 1983, when the economy will most likely be stalling again.''
Naturally, not everyone on Wall Street believes interest rates will rise later this year. Edward Yardeni, chief economist at E. F. Hutton & Company Inc., said in a recent report that he expected interest rates to at least stay at current levels ''until the economy caves in again.'' If interest rates rise another 1 percent, he forecasts, ''business failures and unemployment would soar.''