President Carter's controversial March 14 anti-inflation program has produced visible results in mollifying at least one of the nation's more influential constituent-groups: It has eliminated the turmoil in the beleaguered financial markets.
Although the administration still is not drawing any ticker-tape parades here for its handling of the economy, there is widespread agreement on Wall Street that the March 14 actions have successfully resuscitated the credit markets and averted a possible crash.
The bond market, described as near collapse before the March 14 package, has bounced back smartly and is functioning smoothly again. Interest rates are plummeting from their record highs. Stocks prices are up visibly from April's levels. And virtually all major financial indicators are showing relative strength.
"The rebound has been dramatic," says Henry Kaufman, the respected Salomon Brothers economist whose warnings about the bond market were one of the key factors that precipitated the administration's March 14 turnabout. "The markets," he says, "are breathing a cyclical sigh of relief."
As usual, however, the hiatus is being spoiled by analysts' perennial worrying about how long the current stability can last. Experts caution the government's policies will face another test a few weeks from now over whether the Federal Reserve Board is willing to allow interest rates to edge up again.
"The real question," one insider muses, "is whether the rebound actually is genuine or is only a rally in the bear (weak) market. What we think is that it's a bear-market rally and nothing more. We don't have much confidence that in the long-run inflation will abate."
That the markets should have bounced back in response to the president's package is, of course, only right from Washington's perspective. After all, it was almost solely the threat of collapse in the bond market that prompted the administration to take the March 14 actions in the first place.
The turnmoil came after Carter unveiled his new January budget, which showed larger-than-expected deficits for both fiscal 1980 and fiscal 1981. The markets, fearing a speedup in flation, immediately panicked and went into a tizzy. The bond market took a sharp dive.
Carter's reaction was two-pronged: He revamped the new budget to eliminate the fiscal 1981 deficit. And he ordered the Federal Reserve Board to impose credit controls to help dampen consumer spending. The spending spree by consumers had been adding to inflationary pressures for more than a year.
The result was to push the economy more rapidly into recession and ultimately break the inflationary fever. To the surprise of most economists, consumers reacted sharply to the Fed's new restrictions and virtually stopped buying. Abruptly, the economy fell into a deeper-than-expected slide. s
The resulting economic slide brought about a drop in loan demand and, eventually, a turnaround in interest rates. Within days, the bond market's slide was arrested and stock prices began rising again. Meanwhile, the Fed managed to rein in the money supply. Inflation expectations had been dealt an effective below.
The irony is that for all the political backfilling that Carter's actions required, they are being dismissed here as "not really necessary, in retrospect" -- on grounds that the economy already was headed into a recession. If anything, some now say, the steps only intensified the decline.
"The March 14 package was a lot like Ford's WIN program -- it hit the cycle as it turned," says Barton M. Biggs, research director of the Morgan Stanley and Co. investment house. "The recession already had begun and the bond market was ready to turn. What this did was convert the decline into a free fall."
But others, while conceding that Carter's actions might seem unnecessary now, dismiss such conjecturing as hindsight, and insist the president had no choice but to act dramatically because it still wasn't clear then that the recesion was about to begin.
"To say that it wasn't really necessary is an unfair judgment," says George McKinney, senior vice president and chief economist of Irving Trust Co. "There was no way you could have been sure in March that the recession was coming in earnest. The predicted downturn had eluded us through all of 1979."
The results, in any case, have been dramatic:
Bonds: The bond market, portrayed as being on its deathbed in March, has regained its old zip and then some, with the yields borrowers pay on A-rated industrial bonds plunging from 14.25 percent in late March to 11.75 percent now and still falling.
Perhaps more important, there has been a virtuall explosion in the volume of new isues, with $3.2 billion worth offered in April and the May total now expected to approach $5.8 billion -- far beyond the previous $4 billion record of March, 1975. (The April-May average is more than 2.3 times that of the first quarter.)
And analysts report that most of the new borrowing is long-term, designed to pay off existing short-term debt rather than to finance day-to-day operations as was the case before the recent turnaround -- a far healthier pattern that ultimately could help pave the way for the next expansion.
Interest rates: The rates for 90-day Treasury bills, the most visible form of short-term interest rates, have more than halved over the past two months to 7.7 percent, down from a record 15.5 percent in mid-March. Rates on 90-day certificates of deposit have fallen to 8 percent, from 18 percent in March.
Gold and commodities: Last January's frenetic speculation in gold and commodities investments has cooled considerably in the face of the March 14 credit restrictions. Analysts say in both cases the fever seems simply to have disappeared.
Gold prices now are back into the $500-an-ounce range, from $875 at their January peak, while on commodities the key metals price index has plunged from a February peak of 760 percent of its 1967 average to 380 percent. And there's considerable speculation that they have not hit bottom yet.
Stocks: Buoyed by the sharp drop in interest rates -- and the hope that that will limit the depth of the current recession -- investors have begun returning to the stock market. The result: a minor rally, with the Dow Jones Industrial Average climbing from a low in April of 759.13 to 850.85 on Friday.
Commercial paper: With bank interest rates still relatively high, firms have turned to the use of commercial paper -- a form of corporate IOU -- to finance their transactions. The boomlet has subsided some now that banks have begun offering large borrowers a discount on the posted interest rate. But it's still strong.
Housing; Real estate: With the new drop in interest rates and the relaxtion of credit restraints, there are new opportunities again for investment in real estate -- albeit not at the previous pace. Analysts believe most investors -- and lenders -- will continue to be cautious.
The dollar: Mainly because interest rates here now are below those abroad, the dollar has declined recently. But the dip has not been as bad as some had anticipated. Expectations of a drop in the U.S. inflation rate -- and continued improvement in the trade balance -- are easing the slide. r
The figuring now is that, except for a possible few more percentage-points on the prime, interest rates generally won't dip much below their current levels -- if only because the underlying rate of inflation is expected to remain in the 9 to 10 percent range, even if consumer prices slow.
Rather, what Wall Street seems most worried about now is how the government will perform in what analysts see as the next major test for policymakers: Will the Fed allow interest rates to inch back up again later this summer, or simply "cave in" to political pressures and keep rates low?
The pressure to allow interest rates to rise is expected to come from several quarters:
The Fed now is trying to reverse the recent contraction in money-supply growth. When it finally succeeds, interest rates could begin to edge up again. And the dollar likely will continue to decline. At some point, the central bank will have to move to bolster the U.S. currency, and that means interest rates, too.
Kevin Hurley, financial markets forecaster for Chase Econometrics, predicts the government soon may have to face a time when interest rates begin edging upward before the economy actually starts recovering from the recession -- an unusual phenomenon that could leave policymakers in a serious fix.
The betting among experts here is that Fed Chairman Paul A. Volcker will stick by his announced intention of tightening or easing monetery policy primarily by controlling bank reserves -- and allowing interest rates to fluctuate widely as the market dictates.
But analysts fret that if the Fed intervenes and prevents rates from rising, it could be interpreted here as a signal that the government is caving in to election-year pressures and giving up the anti-inflation fight. That, in turn, could set off another spin.
There also is some concern here over what Congress will do when it finally becomes clear that the fiscal 1981 budget will not be balanced as touted and that the recession really is going to be deep. If the lawmakers move quickly to a massive tax cut, experts say the red-ink figure easily could top $50 billion.
In the meantime, however -- in marked contrast to three months ago -- Wall Street is finally enjoying a bit of calm. It may be, as Irving Trust's McKinney says, that the new health in the markets is more "a response to changed economic conditions that a nod of approval" for Carter's policies.
But as Salomon Brothers' Kaufman concludes, although "history will record it as a kind of overkill, that's a narrow way of looking at events. An overt action was required to really shake inflationary expectations. We had reached the point where gradualism didn't work anymore." e