There is growing evidence interest rates have peaked and may be starting downward, according to a number of financial market analysts.
A $1-billion decline in the money supply for the week ended Nov. 14, reported yesterday by the Federal Reserve, strengthened that belief.
Cautious officials at the Treasury and Federal Reserve, burned at least twice by erroneous suggestions that rates had hit the top for this business cycle, are no longer climbing out on limbs.
But several financial market analysts are beginning to do so, citing the following:
Money supply growth has slowed sharply in the last month and is now well within the Fed's targeted range. Yesterday's announcement that M-1, the total of currency in circulation and checking account deposits at commercial banks, fell to $378.5 billion for the Nov. 14 week, left that measure of money below its average for all of October.
Bank reserves, direct control of which is the aim of the Fed's new approach to managing the growth of money and credit, are little changed from the early part of October. That is in contrast to the rapid growth of reserves immediately prior to the switch in Federal Reserve policy on Oct 6; and indicates no further tightening of credit may be necessary to achieve the Fed's goals.
Commercial and industrial loan demand is falling rather than rising sharply, as it was prior to Oct. 6. The New York Federal Reserve Bank said yesterday such loans at major New York City banks fell $364 million in the week ended Nov. 21. That was the largest one-week drop since early last January, the bank said.
The dollar has been relatively stable on foreign exchange markets, lessening the need for the Federal Reserve to boost interest rates to prop up the dollar. Moreover, the spate of interest rate increases in Germany, imposed by the Bundesbank to slow down inflation in that country, may have run its course. Those hikes put pressure on the dollar until they were matched here, some analysts said.
Finally, financial markets are learning to live with the uncertainties of the Fed's new approach.
"The change in Fed policy on Oct. 6 suggests strongly that interest rates have peaked," said Lawrence Kudlow, chief economist of Bear Stearns & Co. "The bank reserve and money supply followthrough since then make the interest rate peak scenario even more likely."
Allen Sinai of Data Resources Inc. is another financial markets expert who believes rates may have peaked, though he is less emphatic than Kudlow.
Alan Greenspan, a former chairman of the Council of Economic Advisers, said, "My own view is that we are close to (the peak)" if not already at it.
But Greenspan cautioned, "A false peak looks the same as a real peak . . . The outlook is the same in many respects" as the last two times some officials said they thought interest rates were peaking: the economy appears to be "tilting over, but it hasn't yet."
In other words, no one can be certain rates are at the peak until the economy finally and indisputably moves into a recession. Greenspan is now predicting four consecutive quarters of declining economic activity beginning with the current quarter, but that decline, he said, still has not begun.
But in the financial markets themselves, developments are pointing to a peak. Most short-term interest rates have dropped over the course of the last three or four weeks. In addition, the markets seem to be behaving much as the Federfal Reserve hoped they would as a result of the Oct. 6 changes, according to minutes of that important meeting released yesterday by the Fed.
At that meeting of the policy-setting Federal Open Market Committee, some members suggested the shift in operating techniques -- focusing on controlling bank reserves instead of pegging the federal funds rate, the key interest rate banks charge one another when they borrow reserves -- would tend to increase confidence at home and abroad in the (Federal Reserve) system's determination to achieve its objectives for monetary growth and to void further deterioration in the inflationary outlook," the minutes said.