Even lower interest rates expected by forecasters
For once, the Wall Street economists and sages all agree: Interest rates will continue to fall.
The move by the Federal Reserve Board to lower the discount rate to 101/2 percent last Friday is perceived as part of a continuing downward trend in rates. And analysts expect the prime interest rate, the rate banks charge their most creditworthy customers, to continue to fall as well. On Friday many banks lowered their rates to 141/2 percent. On Monday morning two major banks cut their rates to 14 percent.
''My feeling is that the economy is sufficiently weak and the rate of inflation down sufficiently to allow the Fed to become even more accommodative, '' commented Irving Auerbach, a vice-president and economist at Aubrey G. Lanston & Co.
Henry Kaufman, a partner at Salomon Brothers, and one of Wall Street's gurus, agrees. He says he expects the Fed to lower the discount rate another notch soon. The discount rate is the rate at which the Federal Reserve Board lends money to member banks. Mr. Kaufman noted that the Fed has room to ease up, since the money supply in recent weeks has remained within its target level.
And Arnold Moskowitz, first vice-president and economist at Dean Witter Reynolds Inc., said he expected the prime rate cut to 14 percent and forecast that long-term Treasury securities would fall to 123/4 or 121/4 percent over the near term. He does expect interest rates to firm later in September or October as economic activity picks up and traders anticipate the Treasury's huge November funding requirements. But he says that ''they will get nowhere near their peaks, and then interest rates will continue down for the next two years.''
There are also some doubts about how far the Fed can go in easing rates. Monte Gordon, director of research at the Dreyfus Corporation, a mutual fund, asks: ''How far can the Fed go without reigniting inflation? Can they go to 8 or 9 percent?'' And Mr. Gordon says the credit markets will still be watching the action on the budget deficit. ''This is a key point,'' he concludes.
Mr. Kaufman still believes the public and private sectors will be on a collision course later this year when economic activity revives. At that point, he forecasts, interest rates will rise again.
Mr. Moskowitz says that in fact the collision has already occurred. ''The private sector lost,'' he comments, noting that the government has hogged the capital markets. He reasons that capital spending will remain low, since there is a significant amount of excess manufacturing capacity. The farm sector remains depressed and other industries, such as the airlines and steel, are running at extremely low rates. He expects the auto rebound to be ''subpar,'' and the housing revival will be ''anemic.'' Thus, demand for credit from the private sector will remain low.
Mr. Auerbach figures the Fed remains under pressure to keep rates low to help the beleaguered thrift institutions. ''They must allow the thrifts to borrow funds at a cost below the earnings on their mortgage portfolios,'' he comments, ''and allow their net worth position to get to where there is some improvement.''
The Fed also remains under pressure with the collapse last week of Lombard-Wall Inc., a dealer in government securities. This was the second such bankruptcy recently. Earlier this summer, Drysdale Government Securities Inc. closed its doors, which caused some shivers in the financial markets. The Fed reacted by adding reserves to the system to soothe the credit markets. Last week , with the collapse of Lombard-Wall and its subsidary, Lombard-Wall Money Markets Inc., the Fed again showed some ease in the markets. Lombard-Wall Money Markets was not a money-market fund.
Mr. Moskowitz predicts the Fed will remain under a certain amount of ''political pressure,'' too, since bankruptcies will continue to rise through the year. Congressmen returning to their districts this summer will hear that interest rates have not fallen enough to allow businessmen to survive. ''The Fed has been late in reacting,'' Moskowitz sas.
Possibly because of such criticisms, some Wall Street Fed-watchers believe the board may err on the side of laxness. Mitchell J. Held of Smith Barney, Harris Upham Inc., a brokerage house, comments: ''. . . we continue to believe that the Fed is willing to err on the side of a more lenient reserve posture over the coming months, even to the extent of tolerating somewhat-above-target growth in the monetary aggregages. He concludes, ''. . . interest rates across the broad spectrum will be lower by year-end than they are today.'' But he adds a caveat: ''The road to those lower rates . . . promises to be a bumpy one.''