The Federal Reserve Board announced yesterday it is lowering its discount rate another full percentage point to 11 percent -- the lowest since the central bank's initial credit-tightening actions last October 6.
The announcement came after a spate of major banks reduced their prime lending rates by half a percentage point, to 12 1/2 percent. A bid by a Boston bank on Wednesday to push the prime to 12 percent didn't spread industrywide.
Although the reduction in the discount rate was intended only to ratify previous declines in short-term rates generally, the new cut in the prime rate clearly was sparked by earlier Fed action on Wednesday.
The board moved on Wednesday to ease credit conditions further by pushing its key federal funds rate -- to which most other short-term rates are pegged -- to 8 1/2 percent from 9 percent.
The move to liberalize credit has come in response to the deepening recession. The Fed already has dismantled many of the credit restraints it imposed last March 14 and is trying to ease the reins on money-supply growth.
The mood of the financial markets was sobered further yesterday by a prediction from Henry Kaufman, the Salomon Brothers economist whose views are influential on Wall Street, that the recession would prove longer than expected.
In an internal memo, Kaufman said he sees no evidence that the economy is coming out of its "sharp tailspin" yet and forecast that inflation would slow to a 5-percent-to-8 percent pace and push interest rates down further.
Meanwhile, the Council on Wage and Price Stability warned that, despite the recent improvement on the price front, the nation still faces "serious" inflationary pressures that "are widespread and may be difficult to reverse."
The agency also estimated that the so-called "underlying" inflation rate -- comprising price rises that aren't affected by volatile short-term factors -- appears to have risen to double-digit levels.
The reduction in the prime rate yesterday was announced first by Citibank, the nation's second-largest commercial bank and followed immediately by Bank of America, Manufacturers Hanover Trust and several others.
Most local banks kept their prime rates intact pending reviews possibly this morning. A spokesman for Riggs National Bank, for example, said that institution had kept its prime rate at 13 percent.
Yesterday's action to lower the discount rate was approved unanimously by six of the Fed's seven governors. Board member Henry Wallich was absent and didn't vote.
In his memorandum yesterday, Kaufman predicted the prime rate probably would fall below 10 percent this summer, while other key interest rates would continue to decline. He said long-term rates would drop "irregularly."