Major Banks Drop Prime; Jobless Ranks Up 400,000 : Key Lending Rate at 9%, 1978 Level

The nation’s major banks cut their prime lending rates from 9.5% to 9% today, quickly taking a cue they had been waiting for from the Federal Reserve Board, which opened the day by lowering its discount rate from 7.5% to 7%.

The discount and the bank prime rates are now at levels not seen since mid-1978, when both began heading skyward.

Major banks from New York to Los Angeles announced immediately after opening this morning that they were cutting their prime rates--the interest charged their most creditworthy customers for short-term loans--for the first time since mid-June.

“It’s obvious that the banks were waiting for a signal from the Fed to move on the prime,” one money market analyst said. “But their action clears the way for all interest rates, including mortgage rates, to come down.”

The Fed last cut the discount rate last May, when it was lowered from 8% to 7.5%.

Irwin Kellner, chief economist of Manufacturers Hanover Trust Co., said the Fed’s reduction in the discount rate is “a signal, in no uncertain terms, that the Federal Reserve wants to see interest rates come down.”

‘All Would Be Applauding’

“The extent to which interest rates come down will help not only farmers but anybody else who is saddled with debt,” he said. “I would think that all sectors of the economy would be applauding today’s move.”

Among the major banks cutting their prime rate were Chase Manhattan, Morgan Guaranty and Chemical in New York, First National of Chicago, and California-based Bank of America, Wells Fargo and Security Pacific.

Beryl W. Sprinkel, President Reagan’s chief economic adviser, applauded the discount rate cut, saying it was in line with widespread declines in a majority of rates in recent weeks.

“I would expect that the decline in all of the rates, which have brought on the discount-rate cut, would have a favorable effect in many sectors of the economy,” he told reporters at the White House.

Interest rates have already been falling sharply in recent weeks, with mortgage rates in many parts of the country dropping below 10% for the first time in more than seven years.

Reliance on Oil Prices

These big declines have come about primarily because of a belief in financial markets that plummeting oil prices will push inflation lower.

In announcing its action, the Fed took note of the good news on oil prices and said the reduction in the discount rate was taken “in the context of similar actions by other important industrial countries. . . .”

The Fed’s action followed by hours a similar 0.5-percentage-point cut in the Bank of Japan’s discount rate to 4%. On Thursday, the West German Bundesbank trimmed its discount rate 0.5 percentage point to 3.5%.

These actions were expected to accelerate a trend to lower interest rates elsewhere as other industrialized countries move to spur economic growth.

Just last month, Federal Reserve Chairman Paul A. Volcker had expressed a reluctance to lower the discount rate, fearing that such a decline would accelerate the fall in the value of the dollar on foreign currency markets.

Decline Since September

The dollar has been declining rapidly since September. Volcker, in congressional testimony last month, said this drop could raise fears of increasing inflation in the United States.

These worries were apparently mitigated by the inflation-dampening effects of the fall in oil prices and the moves to cut interest rates in other countries.

The action of West Germany and Japan in slashing their discount rates would tend to stabilize the value of the dollar as the relationship of interest rates from one country to another remains static.