Being one of the nation's largest banks Citibank's views on interest rates - which influences everything from what it costs to borrow to how the stock market is apt to perform - are of major interest to a lot of people. To the world at large, the bank, in its widely read monthly economic letter, is pretty much echoing the consensus with the observation: "Peaks in (interest) rates probably are not yet in sight ... and without significant reduction in inflation ...it is impossible to expect any major, lasting easing (of these rates)." Inside the bank, however, the perception of interest rates is much grimmer. Citibank expects them to go through the roof over the short run.
This is evident from an internal memo that was recently circulated to all Citibank officers by the bank's all-inportant Asset & liability Management Policy Committee, the official rate setter for all of the bank's business (from lending to investing). For competitive reasons, the internal Citibank forecasts - which include the "pool rate" (the bank's own projected borrowing costs) - are kept under wraps. However, I've managed to get my mitts on a copy of those projections (which are detailed in an accompanying chart) and they show Citibank is now aligning itself with a small but growing minority that believes short-term rates will not follow the generally anticipated scenario of topping out in the first quarter of 1979. And in fact, Citibank expects them to continue to rise right into early 1980. Significantly, the extreme is no longer the extreme.
Take a look at its projections for the prime rate (the rate at which banks lend money to their best customers). The bank sees the prime jumping from its present 10 percent (which, as you can see, is ahead of its own projections) to 11.5 percent in early 1980 - signifying significant credit-tightening. In the very same period, the bank expects ninety-day Treasury bills to increase their yield from the recent 8.2 percent level to 9.25 percent. A solid rise is also anticipated in the amount of interest that corporations are going to have to offer investors to buy their commercial paper (essentially corporate IOUs). For example, ninety-day commercial paper, according to Citibank's calculations, should yield 10.27 percent in the first quarter of 1980 versus the recent 8.6 percent.
If Citibank is right, it's a scary outlook, especially for the small businessman with inventories to finance. He'll be creamed by the higher charges. Big business would invariably slow expansion, and a recession - perhaps a severe one - would surely follow. There'd also be a lot more people out of work. And if the past is any barometer, stock and bond prices would take a drubbing. You'll note (as the chart shows) the prime hit its peak in 1974, hefty 12 percent, and in that year the Dow Jones industrials tumbled to around 577.
As dreadful as all of this sounds, it should be kept in mind that Citibank's projections are mere estimates, subject, as estimates always are, to revision. It's also worth noting there are some pluses to be derived from a tight-credit, high-interest-rate picture. In brief, lower inflation from reduced economic vigor and improvements in both the dollar and the balance of payments deficit as a result of the sharply increased foreign capital that would flow into the United States to capitalize on the higher interest rates.
In the case of the stock market, some analysts argue that equities - even allowing for spiralling interest rates - would likely fare better this time than in 1974. For one thing, they note that in the face of some bleak interest-rate forecasts, the market's not falling out of bed. They also contend stocks are relatively cheap in relation to alternative investments (such as art and real estate); further, that positive gains would accrue in the market in the event, as some expect, cuts are made in capital gains taxes. It's also felt big pools of foreign capital might well move into the "safe haven" of the U.S. to capitalize on any major drop in stock prices.
Still there's no denying that sharply increased interest rates would scare the dickens out of lots of investors. And if you talk to one of the brightest economic minds around, Albert Wojnilower of First Boston Corporation, you can't help but walk away scared.
"We're following the British example," he says, pointing to an early jump in long-term interest rates on United Kingdom government bonds of 16.5 to 17 percent and soaring inflation rates of 25 percent. (These rates have since subsided to 8-percent inflation and 12-percent bonds.) "England's come down (in its rates), but we'er going up," says Wojnilower, who believes the U.S. is now on a course "where we can approach or even exceed twelve percent in the prime rate." His chief reasoning: lack of controls and restrictions on interest rates and extension of credit. He reiterated that the U.S. "is in the relatively early and cuphoric state of inflation" and offered the rather grim observation: "There's no man on a horseback to step in and do something ... and Carter's not the one because speeches and more speeches are not enough."
I felt like rushing out and buying some Swiss francs.