Most of the nation's major banks pushed their prime lending rates up from 16 1/2 percent to 17 percent today--the second large increase in less than a month.
The resurgence of interest rates during a period of sharp recession has caused many economists to worry that the high rates not only might throttle the economic recovery anticipated in the second quarter of the year, but could send the economy into a deeper and more protracted recession.
The Federal Reserve Board took steps to inject reserves into the nation's banking system today, helping to bring down short-term rates. After the Fed action the key federal funds rate fell from about 16 3/8 percent to about 14 1/2 percent, according to Nicholas Marrone of the Bank of New York.
Three-month certificates of deposit, a prime source of funds for banks, ended the day just below 16 percent. If the rate does not decline from that level, banks will feel pressure to raise their prime rates again.
Chase Manhattan Bank, the nation's third biggest, was the first financial institution to boost its prime lending rate to 17 percent. In Washington, Riggs National Bank also announced it was raising its prime lending rate to 17 percent.
The prime rate is the key business lending rate for short-term loans. Small businesses generally pay more than the prime rate to borrow money, while big companies that need money for periods of less than three months often can borrow at a rate lower than the prime rate.
Edward Yardeni, chief economist of E. F. Hutton & Co., said he is "perplexed" by the continued increase in interest rates during a severe economic slowdown. He said he now believes the economy will decline 5 percent in the second three months of the year, a slide similar to the big dip it took during the last quarter of 1981. Most economists, including Yardeni, have believed until recently that the economy would begin to grow again in the spring.
"Every day the high interest rate pressure continues, the chances increase that something will snap," Yardeni said. Unless the situation eases soon, Yardeni said, there is a 30 percent possibility the economy might sink into "your basic depression."
Interest rates normally are related to inflation, and the administration continues to preach that its inflation-reducing policies will bring interest rates down once investors are convinced the decline in the rate of inflation to about the current 7 percent annual rate is real.
But heavy federal borrowing and the huge pool of corporations waiting to sell long-term bonds keep investors worried about pressures on interest rates, according to Maria Ramirez, an economist at Merrill Lynch, Pierce, Fenner & Smith. In normal times, decreased credit demands during a recession would sharply lower interest rates.
"But these are not normal times. Times haven't been normal for a period of years," she said. "In real terms the difference between the inflation rate and the nominal rate of interest , rates are the highest they've ever been."
Many companies are being squeezed by the high rates and find their profits decreasing at the same time their borrowing costs rise. So far, Yardeni said, the government has been able to merge failing savings and loan associations to prevent a major failure, and a number of companies are selling assets to come up with cash they need--among them, Chrysler Corp., General Motors, and RCA Corp. which is seeking to sell its Hertz Corp. subsidiary.
Yardeni said the Reagan administration and the Federal Reserve are too "complacent" about the economy. He said the administration must move to reduce the federal deficit and the Federal Reserve must act to ease monetary policy, slowly abandoning its focus on the growth of the money supply as the prime target of monetary policy.
Otherwise, he said, rates could continue to climb and for the first time in history there could be a recession during which companies would find it impossible to borrow money at any price. Such a liquidity crisis could trigger a surprise bankruptcy that might send shock waves throughout the economy.