The prime lending rate, only 14 1/2 percent a month ago, climbed to 19 percent today amid signs that it soon will go higher, perhaps reaching last spring's record 20 percent within days.
Citibank, New York's largest, led the way today, raising the interest it charges its best business customers for a short-term loan from 18 1/2 percent to 19 percent. Most other big banks in the country swiftly followed suit.
Shortly after raising its prime rate, Citibank raised the interest it charges brokerage firms borrowers to 20 1/4 percent. Increases in the broker loan rate usually signal increases in the prime lending rate.
Many economists are concerned that the sky-high economy back into a severe recession because consumers will cut back on buying and business will hold off building new plants and making other investments.
The high rates are due both to continued high inflation -- although interest rates are now far in excess of the rate of price increases -- and the Federal Reserve Board's seeming determination to bring the rate of growth of the money supply under control in order to fight that inflation.
Banks say they are forced to boost their prime rates because the cost of funds they raise in the open market is skyrocketing.Open market rates have been increasing in large part because of the Fed's tight money policy designed to hold down the expansion of money and credit in the economy. president of the Bank of New York, the interest rate on 90-day certificates of deposit -- one of the main vehicles banks use to obtain funds they then lend to their customers -- climbed to 18.55 percent at the close of trading today, a sharp jump from the 17.95 percent close on Thursday.
The Federal Reserve, however, which all week had been taking steps to drain funds from the banking system to make it harder and more expensive for banks to make loans, today reversed itself and supplied reserves to the banking system. As a result, the federal funds rate (the interest banks charge each other for overnight loans of excess reserves) tumbled. In the early morning it rose as high as 21 percent, but by the close of trading was near 16 percent. i
Nevertheless, analysts still do not look for the Fed to ease up on its tight money stance until it feels it has the growth of the money supply under control. Late this afternoon the central bank announced that the money supply -- essentially cash and checking accounts -- grew $1.2 billion last week.