U.S. BANKS LIKELY TO LIFT PRIME RATES AGAIN SOON
Major U.S. banks may lift prime
lending rates again within days due to recent increases in
their borrowing costs and speculation the Federal Reserve is
nudging up interest rates to help the dollar, economists said.
    In what was the first prime rate boost since mid-1984, most
banks in early April lifted their rates a quarter point to
7-3/4 pct, citing a reduced gap between the prime and their own
cost of money. That spread has narrowed again.
    "A prime rate increase could happen as soon as tonight,"
said Robert Brusca of Nikko Securities Co International Inc.
    Brusca said a quarter-point prime rate rise to eight pct is
justified because the spread between banks' cost of funds and
the prime rate has narrowed to less than three quarters of a
percentage point.
    He said that spread had averaged around 1.4 percentage
points since last October until it fell below one point and
triggered the April prime rate rise at most banks.
    "We could easily have another prime rate increase as soon
as this week," said David Jones of Aubrey G. Lanston and Co.
    "We've got a fairly good chance of a prime rate rise in the
near future," said Allan Leslie of Discount Corp.
    "Based on the spread between the prime rate and funding
costs, you would ordinarily see a prime rate increase now,"
said Harold Nathan, economist at Wells Fargo Bank.
    However, he said banks may be reluctant to lift the prime
because that would dampen already fairly weak business loan
demand and because some are not sure the Fed will maintain
recent upward pressure on money market interest rates.
    Nathan believes the Fed has let market pressures lift
short-term rates in recent days to help the ailing dollar. He
said "if there is widespread belief money market rates will
stay high, a prime rate rise could occur at any time."
    Fed officials have long expressed concern that too steep a
dollar drop could help rekindle U.S. inflation. As the dollar
fell to a 40-year low against the yen Friday, currency traders
said the Fed and other central banks supported the dollar.
    In addition to buying dollars outright, another way to
stabilize the U.S. currency would be for the Fed to push U.S.
interest rates higher relative to overseas rates.
    Based particularly on the Fed's reserve management actions
on Friday and today, Nathan of Wells Fargo said "it has become
clear that the Fed is not fully resisting upward rate pressure
in the market. It is supplying fewer reserves than are needed."
    Bank funding costs and other short and long-term interest
rates rose sharply Friday and today on heightened speculation
that the Fed is gently firming monetary policy.
    That was because the Fed supplied far fewer reserves in the
market than most economists had expected.
    On Friday, the Fed added reserves indirectly and in small
amounts via one billion dlrs of customer repurchase agreements
with the Federal funds rate at which banks lend to one another
high at 6-5/16 pct. With funds trading even higher at 6-1/2 pct
today, the Fed arranged only a slightly larger 1.5 billion dlr
round of customer repurchase agreements.
    "The Fed's actions on Friday and today show that it is
offering only token resistance to upward funds rate pressures,"
said Jones of Lanston.
    "The Fed is focusing its policy attention mainly on the
need to defend the dollar," Jones said. He believes it is
merely shading policy toward restraint now, "but to have a
major impact on the dollar, the Fed will have to tighten policy
overtly at some point."
    Jones expects the Fed to foster higher market rates by
becoming more restrictive in supplying reserves and, within
four to six weeks, to raise its discount rate from 5-1/2 pct.
    Jones said a U.S. discount rate increase to six pct might
well be accompanied by West German and Japanese rate cuts to
further aid the dollar.
    Given likely Fed policy firming, he said both the yield on
30-year Treasury bonds (about 8.30 pct now) and the prime rate
may be at 8-1/2 pct at end-June and nine pct by year's end.
    "The jury is still out on whether the Fed is tightening
policy to defend the dollar," said Leslie of Discount Corp. He
said tax-date pressures have been pushing up Fed funds lately.
Leslie said Fed actions and reserve data once these pressures
abate will show whether or not it is firming policy.  
 Reuter
