Citibank, the nation's second largest bank, raised its prime lending rate another one-quarter point to 15 3/4 percent yesterday and immediately drew another blast from the chairman of the House Banking Committee.
The chairman, Rep. Henry Reuss (D-Wis.), called the increase "completely unjustified. The banks are simply profiteering by the continuing hikes in the prime rate above what the Federal Reserve's monetary policy calls for," he declared.
The increase was quickly matched by other major banks.
Earlier criticism by Reuss may have slowed the rise in the prime rate, and may have been a factor in limiting yesterday's Citibank, increase. The bank said the formula it uses to set the prime rate called for a 16 percent rate, not just 15 3/4 percent.
Reuss claimed the increase was unjustified because the cost of acquiring funds to lend is now declining. However, a number of market analysts said, to the contrary, that the major banks are facing a profit squeeze.
Donald Maude, an analyst with Merrill Lynch, Pierce, Fenner & Smith, said that since Oct. 3 banks have lost $6.3 billion in regular savings account deposits on which they pay savers only 5 1/4 percent or less. The money has gone instead into higher paying investments.
With the Federal Reserve reducing the amount of reserves held by banks -- either as cash or in deposits at the Fed itself -- and the low growth of all regular deposits, the banks face "a narrowing deposit base of high-cost funds, with narrow profit margins, less loan volume, and a higher loan loss potential," declared Allen Sinai of Data Resources, Inc.
All this, he added, bodes ill for the banking industry.
Whatever the effect on banks, Sinai predicts interest rates are now at or close to their peaks.
Even with this week's report of a $3 billion surge last week in the money supply, its rate of growth is back within the bounds of both the Fed's long-term and short-term target ranges, Sinai noted.
Moreover, the growth of bank reserves, which the Fed is now seeking to control directly through its interventions in the financial markets, "has turned exceptionally weak," he continued. And the demand for commercial and industrial loans, which had been climbing at 25 percent annual rates, has also slowed dramatically.
Sinai is convinced a weakening economy will forestall any possible reversal of these trends that could force the Federal Reserve to tighten the credit screws another turn.
Data Resources, a prominent economic forecasting firm, sees the economy "fading fast," with the gross national product declining at a 1.5 percent to 3 percent annual rate this quarter, Sinai said.
Meanwhile, in a related development, the Federal Reserve reported the nation's factories operated at a seasonally adjusted 85 percent of capacity last month, down from 85.2 percent in September.