Picture, Frederick H. Schultz . . . $1 billion to $3 billion more
The Federal Reserve Board moved yesterday to make more funds available to farmers and small busineses, two groups suffering under the Fed's tight money policies.
Frederick Schultz, vice chairman of the Federal Reserve Board, told a House small business subcommittee that the Federal Reserve will make about $1 to $3 billion in new money available to small banks at the Fed's discount rate of 13 percent to lend to farmers and small businesses.
The banks could then lend the money at an estimated 15 to 17 percent, or well below current interest rates. Those rates for small businesses are normally a point or two above the prime rate.
The interest rates will be set by the individual banks.
Committee chairman John J. LaFalce (D-N.Y.) said he was pleased by the Fed's action "but a lot more needs to be done." He noted that the action was likely to benefit primarily small businesses outside of major cities.
Although limited in scope, the announcement was a clear reaction to complaints by various groups that they have borne the heaviest burden in the administration's fight against inflation.
What the program will do is help meet heavy seasonal demands for borrowing -- such as demands placed on rural banks this time of year as crops are planted. Only banks which have less than $100 million in deposits and which have lent a large percentage of their deposits will be eligible for the program, a spokesman for the Federal Reserve Board said.
"The credit restraints were not meant to fall particularly on small business and agriculture," he said. The program "is to overcome the problem banks have of being 'loaned up'," said the spokesman. "It's putting a safety net under them."
Farmers in the Midwest in some cases have been unable to obtain credit because of banks' shortage of funds. In more cases, however, farmers and ranchers have simply been unable or unwilling to pay interest rates ranging higher than 23 percent in the face of low farm prices.
Small business owners have been suffering under high interest rates in both urban and rural areas, but in rural areas the problem is compounded by reduced purchasing power among farmers.
Small business owners are "under tremendous amounts of pressure and pain," Schultz said during the hearing yesterday. "They can withstand that pressure for some time, but if it's over a long time, they're in trouble," he said.
In other developments related to credit restrictions, the Bank of American announced yesterday that it will charge an annual $12 membership fee on its bank card accounts beginning June 5. The bank's credit card customers include 5.1 million Visa and MasterCard accounts and 500,000 Finance-america Accounts.
In Baltimore last night, the president of a $1 billion money market fund exhorted shareholders to lobby local and federal officials to protect a 15 percent reserve requirement imposed on money market funds. The requirement -- that the funds put 15 percent of increased assets in non-interest-bearing accounts -- has effectively reduced return on investment to the shareholders.
"At best [controls on money market funds] represent a misguided and possibly illegal use of credit controls," said Edward A. Taber III, president of the T. Rowe Price Prime Reserve Fund.
"At worst they may be a politically inspired regulation discriminating against money market funds being so competitive with the individual's traditional savings vehicles," he said.
Taber blamed the restriction on an alliance of banking and savings and loan interests.