Citibank, the nation's second-largest bank, cut its prime lending rate from 16 1/2 percent to 16 percent yesterday. Other banks did not immediately follow the move.
The action by Citibank followed recent marked declines in short-term interest rates, a trend that some analysts expect to continue in coming weeks. However, there is disagreement among Wall Street experts about how far rates will decline and for how long.
Treasury Secretary Donald T. Regan hailed the Citibank drop yesterday, saying that the prime rate cut could be "another patch of blue" for the U.S. economy. He told a group of reporters that he expected rates to continue to fall in months ahead. So far this year interest rates have been higher and the economy weaker than Reagan officials predicted.
Yesterday's prime rate drop was the first for three months when a few banks cut their rate to 16 percent and then quickly put it back up again to 16 1/2 percent. Earlier this week there was a sharp fall in Treasury bill yields to their lowest levels since mid-December.
The federal funds rate, charged by banks on money they lend to each other overnight, also has dropped significantly in recent days. The average for this week so far is 13.8 percent, down from 14.67 percent last week.
As money market rates decline, the cost to the banks of acquiring their own funds falls, and thus gives them room to cut their lending rates. Citibank yesterday said that its lower prime was in reaction to declines in the cost of funds. Senior Vice President Mike Callen said the bank anticipated further rate declines of about two to three percentage points by August.
Last week the Federal Reserve injected funds into the banking system, putting downward pressure on market rates. Some economists believe that this signaled an easing of Fed money policy, which could mean a sustained drop in rates. However, others thought that the main reason for the Fed's action was to calm market fears following the collapse of Drysdale Government Securities.
Fed Chairman Paul Volcker indicated last week that the fast growth so far this year in the narrow measure of money--M1--was not thought to be troubling by the Fed. This could mean that the Fed will hold credit less tight in coming months than some analysts had expected. Technical changes in the public's use of NOW accounts were responsible for much of the M1 bulge this year, Fed officials say. This means that it is less important to try to keep M1, which measures currency and all checking accounts, within its target ranges for the year.
Economists have been puzzled by the persistence of high interest rates despite this year's sharp slowdown in inflation. Some market participants say that rates are being kept up by the indecision over the budget, while others believe that it is primarily the tight money policy of the Fed that has kept rates up.