Nick Brady's Lonesome Call: Lower Interest Rates

Nicholas F. Brady, investment banker, worries a lot about the global capital shortage. From the rebuilding of Kuwait to the unification of Germany to the restructuring of Corporate America's balance sheets, he sees a massive gap between investment needs and the funds available. Nicholas F. Brady, Treasury Secretary, thinks he has the solution: Cut today's high interest rates. They not only threaten growth but block the flow of capital to developing nations, Brady's aides argue.

But Brady has little chance of selling this argument to his counterparts from the Group of Seven nations when they meet in Washington on Apr. 28. These meetings are generally polite affairs, so Brady's colleagues from Britain, Canada, France, Germany, Italy, and Japan probably won't point out that the U. S. budget deficit is the single biggest drain on world capital. The top economic officials of the big industrial nations may be more vocal about a variety of solid reasons to avoid cheaper credit.

NO SLACK. Even though Japanese money growth is slowing sharply, the Bank of Japan, worried about rising labor costs, isn't expected to cut interest rates before late spring. Germany's Bundesbank is taking an even harder line (chart). It may actually raise rates, even though growth is slowing in Europe's largest economy. Auto output slid by 6% in March, thanks to a steep drop in exports, and German companies' profits for 1991 are likely to fall for the second straight year.

Bundesbank President Karl Otto Pohl has little choice but to maintain his tightfisted policy. German unification has loosed a flood of trouble: a 15% surge in the money supply, a $40 billion budget deficit, and unpopular tax hikes--all while unemployment soars in what was East Germany. Inflation-phobic Germans fret that consumer prices could rise 3.5% this year, up from 2.7% in 1990. Wage settlements already are running at twice that rate, and the 2.7 million-member metalworkers' union threatens to strike if it doesn't get a 10% hike. No surprise, then, that Brady's call for lower rates drew a riposte from Pohl: "Slacker Bundesbank policy is not the right way to deal with higher public-sector borrowing or destabilizing wage policies."

Nor can Brady expect much help at home. After nearly two years of rate-cutting, the Federal Reserve Board has shifted into neutral. Divided at their Mar. 26 meeting over whether the economy has hit bottom, Fed policymakers decided to stand pat. There's little evidence that the recession is over. March's startling 6.2% drop in durable-goods orders, coming on the heels of a 205,000-job drop in payrolls, shows that production is weak. Consumption, too, is flat: Retail sales fell 0.8% in March after a February spike. "I haven't concluded that we've hit bottom yet," says Minneapolis Fed President Gary H. Stern.

Other Fed officials see signs of hope. "We do expect the bottom to occur within a reasonably short period," Chairman Alan Greenspan told a congressional panel on Apr. 23. These optimists are focusing more on early signs of recovery: a sharp first-quarter pickup in housing permits, starts, and sales; money-supply growth that's back in the Fed's target range; drops in the number of new unemployment claims; and rising stock prices. The Fed's inflation hawks don't want to add more stimulus just as the economy starts to grow. "We've got to err on the side of preventing inflation," says Richmond Fed President Robert P. Black.

OVERLAP. That doesn't rule out another rate cut, but it likely would be small. The central bank's policy indicator, the federal funds rate, is targeted at 6%, the same as the interest charged to banks for loans at the Fed's discount window. Historically, fed funds cost more than discount-window borrowings, and the Fed's money managers are uncomfortable with the overlap. The Fed may take the discount rate down to 5.5%, but fed funds are unlikely to go below 5.75%. "The bulk of easing in monetary policy is over for this cycle," says Lyle E. Gramley, chief economist of the Mortgage Bankers Association of America.

The feeling among currency traders that U. S. rates are bottoming out has pushed the dollar to a 16-month high of 1.765 German marks. At past G-7 meetings, such a shift would have led to heavy market intervention. But the weak mark doesn't seem to bother anyone but the Germans. Other European countries are using the opportunity to trim their rates, and the Fed isn't willing to dump dollars to fight the markets. So G-7 talk of coordination won't be matched by market action.

As the world's most powerful economic club, the G-7 ought to be wrestling with such serious concerns as the big capital crunch. But Brady's solution--print more money--matches neither the world economy's current needs nor its long-term demand for capital. The G-7 communique will have to find a polite way to tell him so.

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