It happens every spring.
The baseball season begins. The hockey season ends. And, at least for the last three springs, Short-term interest rates rise.
Each time - in the spring of 1975, 1976 again in 1977 - the spurt in short-term interest rates was caused by a temporary tightening in monetary policy as the Federal Reserve Board sought to counteract a sharp speedup in the growth of the money supply.
In 1975 and 1976M those same short-term interest rates subsided after the Fed accomplished its goal of slowing money growth.
This timer, Bert Lance, the director of President Carter's Office of Management and Budget, sharply criticized banks for raising their prime rates - the interest they charge their best corporate customers for short-term loans - in response to other rising short-term rates. Lance said banks have too much, not too little, money to lend. He also obliguely criticized the Fed itself for acting to drive up short-termed rates.
Lance said that rising interest rates are inflationary. On Friday, White House press secretary Jody Powell said President Carter shares Lance's views, that is "fallacious" to think that "you can control inflation by driving up interest rates"
Treasury Secretary W. Michael Blumenthal took a slightly different tack at a Thursday press conference , saying that the market would determine if the interest rates should be higher. Blumenthal did not criticize the Fed or its chairman, Arthur F. Burns, and said it would be time to be concerned if interest rates on long-term loans rise, which has not happened.
There is little direct relation between interest rates in the open market - such as on commercial paper, Treasury bills and the rate the Fed uses to control the money supply (the federal funds rate) - and interest rates consumers pay for loans.
Ironically, as the administration is criticizing the Fed and the banks, short-term interest rates appear to have stopped rising because, as in 1975 and 1976, the Fed took the clamps off as it got the money supply back under control. The money supply is the total of checking accounts and currency in, circulation. Economists think its behaviour is a key determinant of economic growth and inflation.
That is not to say that Lance's criticisms of banks may not be well taken. If anything, the large New York and Chicago banks have a surplus of money, Not a shortage, for loan purposes.
These banks - among them New York's biggest, Citibank anf Chase Manhattan, and Chicago's biggest, Continental Illinois - Boosted their prime lending rates from 6.25 to 6.75 per cent in a two-week period. "Lance is correct when he says that loan demand does not justify an increase in the orime rate," said Leon B. Gould, chief economist for Commercial Credit Corp.
Many big banks do key their prime rates to other short-term interest rates such as commercial paper so that, when market rates rise the prime rate goes up as well. But the prime is an administered rate, set by the bank, and not a market rate imposed by supposedly impersonal forces of supply and demand.
If a bank chooses not to raise the prime rate, it can do so, or whatever its formula tells it.
While there is some evidence that big banks are using several devices to blunt the impact of the higher prime rate for their customers, most of them seem to be operating on the principle that small changes in the prime rate in either direction have little impact on demand for loans. But changes can have good impact on profits, especially because a spectrum of interest rates charged corporate buyers are keyed to the prime - sometimes called the base - lending rate.
Gould, of Commercial Credit, also noted that with the prime at a higher level, banks are in a good bargaining position with their customers to give companies which used to pay a premium a loan at the more coveted prime rate instead.
In smaller cities, the picture is quite different that in the major money centers. Many of the big companies that deal with Chase and Citibank have the option of floating commercial paper to come up with needed funds. Coomercial paper is nothing more than an unsecured note - a corporate IOU, if you will - on which the company to repay the money it borrowed within a certain number of days. Commercial paper interest rates are substantially below the prime lending rate.
Smaller companies usually do not have the option of floating their own commercial paper.
As result, while big banks wallowed in excess funds, loan demand overall rose fairly quickly because of large growth in smaller cities. According to figures compiled by the Federal Reserve, business loans - the bread and butter of commercial bank operations - rose at an annual rate of 15.4 per cent in January, 14.4 per cent in February, 14.3 per cent in March, 14.3 per cent in April, 7.3 per cent in May.
New York Bank's shared in that business loan demand, when loans rose by 11.9 in January and 14.7 per cent in Februay. In March, However, loans fell 9.4 per cent at the major New York banks. They fell 5.9 per cent in April and 7.9 per cent in May.
There is little doubt that the recent rise in short-term interest rates - Nearly a percentage point in the last month and a half - is due to an attempt by the nation's central bank to halt a surge in the growth of the money supply.
The Fed does so by maipulating the federal funds rate, which is the interest banks charge each other for overnight loans of excess reserves. The Fed can affect this rate by adding to or reducing the amount of reserves in the banking system. It decided what Fed funds rate is consistent with the level of reserves it wants to supply to the banking system to keep money grwoth on track.
At one point, market observer thought the Federal Reserve was going to raise the Fed funds target to 5.5 per cent, but in recent days it appears that the Fed has decided to keep the rate - and the supply of reserves that the rate implies - at about 5 3/8 per cent.
Of course, short-term interest rates are affected by more that the activity of the Federal Reserve. Demand for funds as the economy expands and the course inflation runs also are important factors in determining the level of interest rates.
At present, the rise in short-term rate is over and loan demand has moderated, Gould noted. As a result, interest rates should stabilize or even decline over the months ahead. That happened in 1975 and 1976 as well.
But, noted Continental Illinois, the biggest bank in Chicago, the "economy is at a more mature stage of recovery now than in the past stage of recovery now than in the past two years, and rising credit demands could begin to place some upwards pressure on interest rates again next fall.
"This is in sharp contrast to the experience of 1975 and 1976, when interest rates headed down at year-end," the bank said.