Chemical Bank, the nation's sixth-largest, today raised its prime lending rate from 10 3/4 percent ot 11 percent, the first time a major bank has raised that key interest rate since mid-April, when the prime hit a record 20 percent before beginning to decline.
Chemical had dropped the prime rate, the interest it charges its biggest and best corporate borrowers for a short-term loan, from 11 1/2 percent of 10 3/4 percent just 11 days ago. The bank said that increases in other short-term interest rates since then made today's action "appropriate."
Economists, however, are divided over whether recent increases in short-term interest rates represent the end of the decline in lending charges for the current business cycle or whether the recent "firming," as bankers say, is temporary.
Walter Hoadly, chief economist at Bank of America, the nation's biggest, said today that despite the recent rise in short-term interest rates, he anticipates further declines later on "because I expect that consumer prices will edge down further and because of weakness in loan demand due to the recession."
Kenneth Froewiss, of Morgan Guaranty Trust Co., said that while there may be a little further "movement down," for the most part the interest rate decline is over.
Froewiss said that by 1981 interest rates "will begin easing upward," because the Federal Reserve Board does not want to make the mistake it made in 1975 through 1977 when it permitted the money supply to grow too fast in helping along an economic recovery but in the process sowed some of the seeds of the double-digit inflation the economy has faced in recent years.
One thing is clear: In the last two weeks the Federal Reserve has taken actions that confused and upset the money markets.
Two weeks ago, the Federal Reserve allowed the so-called federal funds rate to fall 8 1/4 percent before stopping it, then took actions to keep it from rising above 8 3/4 percent.
Analysts, used to a Federal Reserve that kept the federal funds rate trading in a narrow range, assumed the Fed had eased its monetary policy (previously the Fed seemed to have set 8 3/4 percent as the bottom, not the top of its range).
The Federal Reserve has said, however, that it not longer will concentrate on the federal funds rate as much as it did and instead will focus on the growth of the money supply. The Fed tries to control money growth -- which nearly all economists agree is an important factor in inflation and production -- by buying and selling government securities in the open market, alternately injecting or absorbing reserves off which banks can make loans.
Just as analysts proclaimed the change in Fed policy -- the Fed never says anything -- the central bank allowed the rate to climb again. It reached 11 percent last Friday.
However, even as Chemical was announcing an increase in its prime lending rate, the federal funds rate began to decline. The rate fell to about 8 percent in late trading today.
Chemical was one of the few major banks to drop its rate as low as 10 3/4 percent. Most other banks have kept their prime rate at 11 percent and a few are even higher.
Last week, apparently in an effort to keep money supply growth from getting out of hand, the Federal Reserve Board drained about $4 billion in reserves from the nation's banking system. That touched off a search by some banks to find spare reserves at other banks.
The fed requires its member banks to keep a certain portion of their deposits on reserve at the central bank. If a bank's reserves drop below the required level, it often "buys" excess reserves from other banks -- in the so-called federal funds market.
The Fed can control the federal funds rate by either injecting or withdrawing reserves.
One economist, who asked not to be indentified, said it is likely the Fed is putting the reins on money growth now to avoid having to do it in the future, when the unemployment rate will be higher than the current 7.8 percent. f
Even if the recession is nearing its end, as many economists think, the unemployment rate may continue to rise for several more months.
The Fed already has announced that it wants to slow down the rate of money growth next year and today a House Banking Committee report said it agreed with the Fed's goals.