INTEREST RATES are rising again, but this time it's not the Federal Reserve Board's fault. The uncomfortable truth is that no one in the U.S. government has instigated this rise -- or can stop it.
The latest is the half-point rise in the banks' prime lending rate. It's gone up because foreign investment has become a little harder to attract, and the whole American financial system is now crucially dependent on foreign money.
There is a direct link between interest rates and currency exchange rates. There's a trade-off. It is impossible to stabilize both at the same time. Each is the instrument for adjusting the other. If the United States tried to hold its interest rates stable, the dollar would fall. Since it is trying to hold the dollar level against the mark and the yen, the interest rates have to move.
Last spring Japan and West Germany were intervening in the foreign exchange markets to keep their own currencies from rising farther and destroying their export trade. They bought dollars and sold their own currencies in enormous volumes. Pumping out their own currencies on that scale is inflationary, and to offset that inflationary pressure, they have been raising their own interest rates. A slight lift in German rates on Tuesday seems to have been the final nudge toward the rise in the prime rate here a day later.
The dollar's exchange rate will stay steady only as long as the stream of foreign money into this country balances the big American trade deficit. To keep attracting that foreign money, American interest rates have to be higher than those abroad. That's the penalty for running those deficits.
Americans are now unhappily re-learning these international connections. They often speak as though this kind of economics were all new. It's not. It was very familiar to Americans in the 19th century, when this country was a developing economy dependent on European investment. Then, becoming dominant in the world, the United States could afford the luxury of forgetting how the adjustment process works. It was left to other countries to adjust to the United States. But that happy period ended in the 1970s. The trade deficit is declining only very slowly, and it looks as though there are further interest rate increases ahead.