The prime lending rate should fall to 11 percent by the end of the year and continue to "drift down" until the spring, the outgoing president of the American Bankers Association predicted today.
Llewellyn Jenkins, who also is vice chairman of giant Manufacturers Hanover Co. of New York, said that by March or April the first signs of an economic turnaround should be apparent and an accompanying increase in demand for credit should halt the decline in interest rates.
But it will be 18 months to two years before the economy is growing at a rapid rate, Jenkins said.
Although Jenkins couched his forecast in optimistic terms, his prognosis of six more months of recession would be considered a bleak one by most analysts. The economy already is in the throes of the worst recession since the Great Depression and Jenkins said the full signs of an economic turnaround won't be in place until next summer.
It was just such a forecast about two weeks ago that apparently convinced the Federal Reserve Board, the nation's central bank, to loosen up its tight money policy in order to foster a decline in interest rates.
Rates have fallen sharply since last June, and in the last two weeks, apparently as the result of the new Fed policy, have tumbled even further.
In early July, the prime lending rate -- the rate on which the charge for most short-term business loans is based -- was 16 1/2 percent. Today it is 12 percent.
In the open market, where banks "buy" most of the funds they then lend to their customers, rates have declined by six percentage points or more in the same period. Even so, by historical standards, rates remain high.
Jenkins, speaking to reporters at the annual meeting of the bankers group here, said it was not direct policy steps by the Fed that triggered the decline in rates, but rather weakened loan demand during a period of recession. The Fed's main role, he said, was to permit interest rates to decline, rather than take steps to keep them higher.
Most analysts, however, feel the Fed has taken a more direct role in pushing down interest rates.
Jenkins also denied that U.S. banks are saddled with an inordinate number of problem loans and said that fears about U.S. bank lending to developing countries are exaggerated.
He admitted that the level of problem loans is rising at many banks, but said it is a normal development in an economic cycle and should not be considered "a danger signal." He said that only about 120 of the nation's 14,600 banks are seriously involved in foreign lending and said they are all strong enough to absorb any losses that might occur.
Meanwhile, Presidential counselor Edwin Meese said yesterday the economy was moving toward recovery and predicted the record unemployment rate would drop early next year.
"All of the indicators show we are moving toward recovery as the president promised," Meese said on CBS News' "Face the Nation" program. "Things are improving and we are working hard now to bring the unemployment rates down.
"Early next year you're going to see some drops in the unemployment rate."
On another televised talk show, Democratic economist Lester Thurow warned of "permanent stagnation" if Western leaders do not join together soon to devise a means of reviving the world economy. "I think it is really a mistake to think of the current situation as an American recession," Thurow said on ABC's "This Week with David Brinkley" program. "It's really a worldwide economic shutdown."
Without action, "I think that we could get ourselves mired down in essentially permanent stagnation, and we're very close to that," said Thurow, a professor of economics and management at the Massachusetts Institute of Technology and a frequent adviser to the Democrats.
Appearing on the same program, economist Alan Greenspan agreed that the problem is international. But Greenspan, a member of President Reagan's economic advisory board, said the United States could pull itself out of the recession even if the rest of the world doesn't. He said a cut in mortgage rates could stoke the nation's homebuilding market enough to trigger a full-scale economic recovery.