INTEREST RATES, as you may have noticed, have been inching slightly but steadily upward for the past month or so. It's nothing dramatic or, so far, terribly significant. It's merely a reminder that the coming recovery is not going to solve all of the country's economic troubles. Interest rates are clearly not going to follow the trend of inflation downward. Over the past winter inflation has been negative; consumer prices in February were actually just a bit lower than they were last November. But interest rates are not moving with them.
Because interest rates have moved up a little, the U.S. dollar's exchange rates against other currencies are also up a little. And because that makes American exports harder to sell, by the same slight degree, it's not helpful for American employment. The drop in American exports last year was chiefly responsible for the unexpected prolongation of a recession that, everyone thought a year ago, would surely end last spring.
The rise in the interest rates is a reaction to the rapid increases in the money supply and the swelling federal deficit. Usually the federal government's borrowing requirements in the spring quarter are negligible, because of income tax filings in April. This year is apparently going to see a startling departure from that pattern. One economist, Henry Kaufman of Salomon Brothers, the investment banking firm, estimates that the Treasury will need to borrow $42 billion in this year's spring quarter. That's four times the borrowing in the same quarter last year. Against that kind of pressure the Fed- eral Reserve Board can hope to stabilize either the money supply or the interest rates--but not both.
The financial markets' economists are worth listening to. Another of them, John D. Paulus of Morgan Stanley and Co., has been arguing that large deficits and rising interest won't choke off the economic recovery that is now beginning--but they will distort it in deeply damaging ways. "What is at stake for U.S. workers is not just jobs," he recently observed, "but the quality of their jobs." Sustained high interest costs and heavy federal borrowing will slow the flow of capital into the competitive new industries that promise the highest productivity gains. It is productivity that raises real wages and standards of living.
From its beginning the Reagan administration has run a self-contradictory economic policy. It points its fiscal policy in one direction, with hugely expansive deficits, and its monetary policy in the other, with tight money and high interest. It would be a bitter irony if this administration, after all its talk about increasing capital formation and productivity, ended by stunting and deranging those crucial processes with its uncontrolled deficits. But that is the warning from Wall Street.