High interest rates, the focus of much presidential rhetoric in the waning days of the 1980 campaign, may not fall in the coming months as conventional banking and economic wisdom predicts.
The recent rebound in interest rates -- the prime rate rose from 11 percent in early August to 14 percent last week -- occurred in the absence of loan demand, as the recession depressed the credit needs of U.S. corporations. Most of the rise in rates was attributed to a tight money policy on the part of the Federal Reserve Board.
But since early September, demand for credit on the part of businesses (and, to a lesser extent, individuals) has begun to climb sharply again. Just as the price of a ton of steel is determined partially by the cost of making it and partially by demand, so too does the price of credit (interest rates) depend on cost and demand.
According to William Sullivan, senior vice president of the Bank of New York, business credit demands -- both from their bankers and on the "open market" -- have "exploded" in the last six weeks. Although bankers have advanced many explanations for the growth, most admit that none of them are totally satisfactory.
Even bankers who say their institutions have not seen a significant increase in loan demand are concerned that loans are not falling at this stage in the business cycle.
John Ingraham, senior vice president of Citibank, said that "while you would expect outstandings [loans] to fall, they are not," and that reflects a strength in the economy that suggests a "rise in loan demand of more significant proportions sometime in the future."
There is mounting concern among some bankers that the current 14 percent prime rate may go higher rather than lower. If the tight Federal Reserve policy is joined by growing demand for credit as the economy moves from recession to recovery, then pressures on interest rates will become stronger.
Bankers prefer lower rates -- like presidents, consumers and corporate treasurers -- because it is easier to make money and easier to keep a low political profile.
The current surge in loan demand "is something that bears monitoring. You just can't put it on the back burner. But my own guess is that we'll look back in January and say, 'There was no reason to worry.' But given the evidence, it is something you can't absolutely rule out," according to Frederick Deming, senior vice president of Chemical Bank.
Since the end of August, bank loans at the nation's biggest institutions have grown $5.7 billion, while total business demands for short-term credit have increased about $9.1 billion. While some of the increase in bank loans may have come about at the expense of the so-called commercial paper market, in recent weeks both bank loans and commercial paper have been rising.
Analysts cite a number of reasons to explain the sudden jump in short-term borrowing:
High long-term interest rates are discouraging companies from selling bonds and, as a result, not only preventing corporations from paying off bank loans with the proceeds from bond issues but forcing companies to borrow more from their bankers while waiting for long-term rates to come down.
According to some estimates, there are more than $4 billion in bonds awaiting a decline in rates and even more that companies have not announced. The notion that many companies have is that it is better to pay banks 14 percent for several more months than to pay bondholders 13 percent for 30 years.
The end of credit controls has permitted banks again to make loans to companies trying to buy other companies. "Three or four months of pent-up activity has been concentrated into just the last few months," according to one economist.
Companies had to borrow late last month to meet their tax payments because profits are still down from the recession.
George Baker, senior executive vice president of Continental Illinois National Bank, said that although his bank has not seen as great an increase in loan demand as the overall figures might suggest, none of the explanations is totally satisfactory.
"I know the numbers, but I cannot figure where the demand is coming from, who's getting it or why it is occurring, based on what we're seeing," said Baker.
Nevertheless, the demand is there and has been for the last six weeks. And the longer the economy moves from recession to recovery and ultimately to expansion without a sharp decline in loan demand, the more likely it will be that the 14 percent prime rate may stick around for a long time or even rise.
"I think that we will not start the next cycle with a 14 percent interest floor," said David Woolford, senior economist at First National Bank of Chicago. Woolford said he thinks that demand will taper off as soon as companies overcome the initial financing needs triggered by the move from selling off inventory to keeping it constant or rebuilding it.
But he admits that loan demand cropped up at a time that was not expected, and the more weeks that demand keeps rising, the harder it gets to explain.
"I still think that rates will come down again," Woolford said, "but each time I say that I hear a little English voice behind me reminding me that that did not happen in Great Britain."