Partly in respone to signs the Federal Resere is continuing to tighten its grip on credit, several major banks yesterday raised their prime lending rates from 17 percent to 17 3/4 percent, the highest level since last may.
The continuing surge in rates increasingly is leading analysts to predict an imminent credit crunch similar to the one last spring that toppled the economy into a recession.
Under current economic conditions, an 1, percent prime is "the choke-off level of many businesses," economist David M. Jones of Aubrey G. Lanston & Co. warned. "Medium-sized and smaller businesses will be unable to borrow at these levels. The harsh reality is that economic activity could be choked off."
Home sales already have dropped sharply with mortgage interest rates soaring, and new car sales are bing hurt, as well. In the second 10 days of this month, auto sales were down 10 percent from the same period a year ago, well below what American car manufacturers had hoped would be the case after introduction of their new fuel-efficient 1981 models.
Chase Manhattan Bank, the nation's third-largest bank, led the parade of banks raising their prime rates yesterday. It was quickly followed by Manufacturers Hanover Trust Co., Morgan Guaranty Trust Co. and Chemical Bank, all in New York, and by Continental Illinois National Bank & Trust Co. and First National Bank in Chicago.
Riggs National Bank of Washington said its prime will go to 17 3/4 percent on Friday.
San Francisco's Wells Fargo Bank lifted its prime rate to 18 percent.
The prime, which is the rate banks charge their most credityworthy corporate customers, reached 17 percent last week after being at 14 percent only a month ago.
The latest increase was triggered when the Federal Reserve allowed the key federal funds interest rate to reach 16 1/2 percent on Tuesday and was above 17 percent yesterday. (This is the rate banks charge when they borrow to keep required rserves on deposit at the Fed and is a good indicator of whether the banking system generally is pinched for funds.) Similarly, banks were paying 16.9 percent for money obtained by issuing large 60-day certificates of deposit (CDs).
Typically, large money center banks seek to keep their minimum interest rate for loans about 1 full percentage point above the cost of obtaining funds by borrowing reserves or issuing large CDs.
The Federal Reserve has been letting tight money market conditions drive up interest rates in a concerted effort to slow the recent rapid growth of the money supply.
One closely wateched measure of the money supp.y, M1-B, which includes currency in circulation and all types of checking account deposits at commercial banks and thrift institutions, is already several billion dollars above the level the Fed had targeted for the current quarter. Thus most analysts expect the central bank to keep a short rein on credit until the money supply falls back within its trageted range.
The move to a 17 percent prime and beyond came after Fed Chairman Paul Volcker, in congressional tetimony presented last week on behalf of himself and the six other members of the Federal Reserve Board, left no doubt the Federal Reserve would perserve in its attempt to keep control of the money supply even if it does abort the recovery.
Allen Sinai, an economist with Data Resources Inc., said that after the beginning of a recovery from recession "the appearance of a second [credit] crunch would be unusual, although with a precedent in 1973-74 when a second squeeze occurred because of another burst of high inflation.
"The similarities now are striking," Sinai noted, "since the inflation raging in 1973 surfaced again during the middle of 1974 and because of the resillency of a severe double-digit inflation in this episode.
"Also, once again the central bank is not hesitating to attack an entrenched inflation, perhaps creating a crunch in order to break inflationary expectations and to slow the economy down," he continued. With uncertanty over the stimulus or restrant to come in fiscal policy and a hiatus of inaction between adminstrations, the central bank has again been thrust into the position of the last outpost against inflation."