Banks Lift Prime Rate to 3-Year High of 10%

Major U.S. banks raised their prime lending rate half a percentage point today to 10%, the highest level in three years, as the Federal Reserve’s squeeze on inflation rippled through the economy.

The rise in the prime rate came two days after the Federal Reserve Board surprised financial markets by raising the discount rate half a point to 6.5%.

The increase brings the closely watched prime rate to its highest level since June 18, 1985, when it was lowered to 9.5% from 10%.

Chase Manhattan Leads

Chase Manhattan Bank started today’s move, with Citibank, Manufacturers Hanover Trust, Chemical Bank, Bankers Trust, First National Bank of Chicago and Continental Illinois National Bank and Morgan Guaranty quickly matching the raise.

Major banks on the West Coast, such as Wells Fargo Bank and Security Pacific National Bank, also followed suit.

It was the third time this year that banks have raised the prime, which is used in setting a range of fixed- and adjustable-rate corporate and consumer loans.

“With interest rates moving higher you’re going to see increases in fixed- and adjustable-rate mortgages (and) floating lines of credit,” said Elizabeth G. Reiners, an economist at Dean Witter Reynolds Inc.

“If you want to go out and get a car loan or an unsecured line of credit to buy furniture, that’s going to cost you more.”

Raised in July

The banks last raised the prime rate a half point to 9.5% on July 14.

Some economic studies have shown that each half-point increase in the prime rate adds $500 to the annual mortgage payment on a typical adjustable-rate mortgage.

The resulting reduction in disposable household income will affect purchases and hold down inflationary pressures that come when consumers have large amounts of money to spend.

Economists had worried that the low U.S. unemployment level, coupled with high demand for goods could push up wages, adding to inflationary pressures.

The higher prime helped the dollar regain the psychologically important 1.90 West German mark level and even the benchmark 30-year Treasury bond inched up, while oil was barely changed and gold turned lower.

Little Reaction in Stock

But stocks, which had fallen steeply since the discount rate rose, barely reacted.

Market and political analysts had not expected the Federal Reserve, whose members were all appointed by President Reagan, to increase the discount rate, the rate charged by the Federal Reserve system for short-term loans to banks, so close to the November presidential election.

But many economists applauded the discount rate increase. They said it showed that Fed Chairman Alan Greenspan was asserting his independence from the Reagan Administration.