Major Banks Follow Fed’s Lead, Cut Prime Lending Rates to 8.5% : Loans: The moves will have a swift effect on consumers but not on Christmas sales, economists say.

Major U.S. banks, including Bank of America, Citibank, Bank of California and Wells Fargo, cut their prime lending rates to 8.5% from 8.75% on Wednesday, following the Federal Reserve Board’s quarter-point cut in the federal funds rate.

The moves will have a swift effect on consumers, whose purse strings are linked to prime rates through credit card and home equity loans. However, the effect is likely to be too little too late when it comes to bolstering holiday sales in what has turned out to be a lackluster Christmas shopping season, economists say.

“I don’t think it will have as much of an effect on Christmas sales,” says Chris Taylor, an economist with Wells Fargo Bank in San Francisco. “But holiday sales may end up a little bit better than anticipated simply because Christmas falls on a Monday, so we have this whole weekend to do last-minute shopping.”

Most consumers will not feel the rate cuts’ effect until January, when bills for home equity loans start coming in. That is also a month when variable-rate credit cards go through their annual, quarterly or monthly interest rate adjustments, says Robert B. McKinley, editor of CardTrak, a credit card newsletter published in Frederick, Md.

At that point, however, the rate cut will have a sweeping impact, because the interest rates on about $225 billion of the $350 billion owed on bank cards are tied to prime rates, McKinley says. Over the course of the year and assuming no change, the 0.25 percentage-point cut will save Americans a whopping $500 million in interest charges.

That’s just a few dollars per card outstanding, McKinley notes, but the biggest savings will be realized by the people who need it the most--those who are most in debt. Consequently, the rate cut will have a modestly positive effect on personal wealth, says Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles.

In addition, long-term interest rates have dropped significantly over the last several months, thanks to serious talks about reducing the federal deficit, Reaser adds. Although long-term rates are not directly linked to prime rates, they also eased this week, partly because of the prime rate moves and partly because of continuing optimism that a balanced-budget bill is imminent.

Since this time last year, rates for 30-year, fixed-rate mortgages have fallen 2 percentage points to roughly 7.25% today, Reaser says. For homeowners who choose to refinance mortgages, today’s lower rates could save them thousands of dollars over time, she notes.

Over the long haul, this cut could spur sales of big-ticket items such as cars and houses, according to Wells Fargo’s Taylor. But the immediate economic boost from the latest prime rate drops is likely to be modest. “It will have a small effect, particularly on the interest-sensitive sectors such as housing and consumer sales--perhaps it could give a boost to auto sales as well,” she notes.

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Impact of the Rate Change

The decision by major U.S. banks to cut their prime lending rates will:

* pare credit card borrowing costs for 80% of Americans who hold variable-rate credit cards;

* cut interest rates on home equity loans as well as other personal lines of credit tied to the prime rate;

* combine with drops in long-term rates to make many Americans somewhat better off in 1996 as ripple effects encourage companies to grow.