Flation

At the Washington showings of The Senator Was Indiscreet, Government bigwigs got a laugh out of the senator's proclaiming himself "Against inflation, against deflation, for flation." Last week, nobody was laughing over the Administration's meandering in the no man's land of flation.

Its intentions were toward deflation--just a little deflation. Treasury Secretary John Snyder upped to 1 1/4% the 1 1/8% interest rate on short-term Government bonds. lie expected, rightly, that banks would follow the example and raise interest rates, thereby curbing the inflationary expansion of credit. By midweek, some bankers announced plans to boost basic lending rate from 1 3/4% to 2% (for borrowers with the highest credit rating) and to adjust other rates accordingly.

The Federal Reserve System also moved toward deflation when nine of its twelve district banks raised their rediscount rates (i.e., the rates which member banks pay on loans from the Reserve Banks) from 1 1/4% to 1 1/2%. Their strategy was the same: to raise the cost and thereby lower the amount of borrowing.

Few thought that the results of Snyder's action would prove much of a damper on the inflated market. The cost of borrowing would have to be much higher to be effective. As for the rediscount rise, its effect would only be psychological. Borrowings by member banks from the Federal Reserve Banks are relatively insignificant, at less than $300 million. With excess reserves of over $1 billion, member banks were not likely to raise the volume by much, nor feel any actual pinch because of the higher charges.

Most bankers agree that a more effective way to curb credit is for the Federal Reserve Board to raise the percentage of deposits which member banks are required to keep in reserve, thus limiting the amount available for loans. But FRB, fearful of the effect on the sensitive credit structure, was reluctant to raise reserve requirements. With curbs on installment buying going into effect next month, FRB thought it would "wait and see" before making further moves.

Meanwhile the Federal Housing Administration would be meandering toward inflation with the new housing law which Congress passed last week. Its main provision is something called "yield insurance," by which the Government will back private investment in emergency housing up to 90% of capital outlay, and insure a 2 3/4% profit. With houses now going up about as fast as the supply of materials will allow, the likely result would be an imperceptible rise in new housing, and an appreciable rise in already inflated building costs.

This file is automatically generated by a robot program, so reader's discretion is required.