Chase Lowers Prime Rate to 10.5% From 11% : Other Banks Expected to Follow in Response to Easing Fed Policies
Chase Manhattan Bank, the nation’s second-largest bank in terms of assets, lowered its prime lending rate by a half percentage point to 10.5% on Monday, but the other New York “money center” banks did not immediately follow suit.
Economists said the other banks probably would cut their prime rates soon in response to a general downward trend in interest rates that has lowered the banks’ own cost of funds. But they said the relatively unusual split among the top New York banks was caused by uncertainty over signals from the Federal Reserve, especially the Fed’s intentions concerning a bellwether interest rate known as the federal funds rate.
A general expectation of lower interest rates helped drive the Dow Jones industrial index up 14.80 points Monday to close above the 2,500 level.
Banks last lowered their prime rates June 5, as the Fed began to ease monetary policy in response to signs that the U.S. economy was slowing down.
‘Good News’ for Borrowers
Since then, economic indicators have confirmed a slowdown in the economy, although economists do not see any strong signs yet of a recession. A general cut in the prime rate to 10.5% would return the rate to where it was at the beginning of the year.
The prime rate charged by commercial banks is a benchmark used to set rates for many types of consumer and business loans, including many home equity loans and adjustable-rate home mortgages.
Another general drop in the prime rate by banks nationwide, therefore, would be good news for holders of such adjustable-rate loans. It should also translate into more affordable new mortgages and stimulate the housing industry, which has been in the doldrums in recent months.
At least three smaller banks also lowered their prime rates to 10.5% on Monday. They are American Pacific State Bank in North Hollywood, First Federal Savings Bank of Boston and Union Bank & Trust Co. of Alabama. Southwest Bank of St. Louis, a medium-sized regional bank that has been the trend-setter for recent prime rate changes, had acted first, lowering its prime to 10.5% on Friday.
Robert Dederick, chief economist at Northern Trust Co. in Chicago, said he believes that interest rates in general are headed lower. “The economy is going to be sluggish enough that we’ll see further movement downwards,” he said.
Economists, however, seem uncertain about how long the downward trend will continue. David Rolley, senior economist at the New York investment banking firm of Drexel Burnham Lambert, predicted that the economy, fueled in part by a strong housing industry, would actually gain strength later this year.
Rolley said lower interest rates in the bond market and in Treasury bills reflect an expectation of recession. He said those rates probably would rebound if the economy picks up steam in the second half of the year. Nevertheless, Rolley predicted that the other major banks will follow Chase’s lead in cutting the prime to 10.5%, within about a week.
The major banks usually act more or less simultaneously in moving the prime rate. “Usually the money center banks are like pigeons on a telephone wire,” said Paul Getman, an economist at the WEFA Group, an economic consulting firm in Pennsylvania. “When one gets up, they all get up.”
Getman said the last time one money center bank acted and the others did not follow suit was on the Friday before the October, 1987, stock market crash, when Chemical Bank was alone in raising the prime by half a point, only to rescind the increase after the crash.
Getman said the other banks may be hesitant now because the Fed apparently is allowing the federal funds rate to drift only about a quarter of a percentage point lower, to about 9.25% from 9.5%, rather than allowing a full half percentage point decline from its stable level in recent weeks.
Seek Stable Profit Margin
The federal funds rate is the rate charged on short-term loans between banks. The rate is an important component of the banks’ cost of funds--others include the interest rates they must pay on certificates of deposit and, for larger commercial banks, the rates on Eurodollar CDs. But the federal funds rate is also seen as an important measure of the Fed’s intentions on interest rates.
Banks raise and lower the prime rate to maintain a stable profit margin between their own cost of funds and the interest rate they receive on loans. Banks usually like to maintain a spread of about 1.5 percentage points between the cost of funds and their best loan rate.
Getman and Robert Defina, first vice president and senior economist at Security Pacific National Bank in Los Angeles, both noted that the Fed lately has been following rather than leading the general decline in interest rates. They said the Fed’s hesitancy may reflect a feeling that the drop in market interest rates may be excessive, given that the economy is still growing--at about 2% annually.
