Major banks lowered their prime rates a half percentage point to 16 1/2 percent today, less than a week after they pushed the key lending rate up a like amount to 17 percent.
Among major banks lowering the rate on which most short-term business lending charges are based were Bank of America of San Francisco and Citibank of New York, the nation's two biggest banks, and Washington's Riggs National Bank.
Last Wednesday, when the prime rate increased, banks said the cause was a sharp hike in the cost of funds they borrow on the so-called open market and lend to their corporate customers. Today's reduction was linked to an even more marked decline in borrowing costs during the past five days.
The key short-term interest rate, the so-called federal funds rate, climbed from around 14 percent in late January to 16 percent last week and over the past five days has fallen to about 13 percent.
The federal funds rate, the interest banks charge each other for overnight loans of excess reserves, is one that is closely linked to monetary policy actions of the Federal Reserve.
Wall Street economists said it is not clear whether the recent decline in the rate is a signal that the central bank has embarked on a policy to reduce interest rates to fight a worsening recession or merely another change in what has been a three-year saga of volatile interest-rate movements.
"It's hard to figure out what the Federal Reserve is doing," said William Sullivan, vice president of the Bank of New York.
Federal Reserve Chairman Paul Volcker, testifying before the House Ways and Means Committee today, said the central bank remains committed to a tight-money policy to continue to bring down the rate of inflation and said it is too early to predict that interest rates will continue to fall over the coming weeks and months.
Increasing numbers of economists are becoming worried that continued high interest rates during a period of severe recession could prolong that recession and even make it so bad that it could turn into a depression. Financial markets, beset by high and volatile interest rates for the past three years, have become so sensitized that rates fall and rise sharply, based on admittedly inaccurate weekly reports on the money supply.
The money supply, essentially cash and checking accounts, is a major factor in inflation and economic growth and the Federal Reserve Board, through its policies, tries to keep money-supply growth on a track it feels is consistent with both economic recovery and reduced inflation.
The erratic behavior of interest rates in the past several weeks has been laid at the door of the Federal Reserve, the nation's central bank whose monetary policies have ranged from seeming tightness to relative looseness since the last few days of January.
Richard Peterson, chief economist for Continental Illinois National Bank, Chicago's biggest, said the gyrations in the growth of the money supply in January forced the Federal Reserve to take strong steps to stem that growth. When it appeared that the Fed had money growth back under control, it could ease up again and provide funds to the banking system that banks then could lend.