The stock market took another plunge yesterday and closed at its lowest level in almost two years. Not even the news that several major commercial banks trimmed their prime lending rate by half a point to 16 percent could give the market an up day.
Word of the prime rate cut caused a brief, strong stock market rally, but then the averages began to fall. At the end of the day, the Dow Jones Industrial Average was down 11.89 points to close at 795.47, its lowest level since April 23, 1980, when credit controls imposed by President Carter and the Federal Reserve were choking economic activity and pushing the nation into an earlier recession.
While reasons for changes in stock prices are usually hard to pinpoint, most analysts said they believe that the market is reflecting the poor earnings prospects for many companies during a recessionary period, as well as a general uncertainty over the future course of economic policy.
Chase Manhattan Bank, the nation's third largest, was the first major bank to cut its prime yesterday, with Morgan Guaranty Trust Co., the fifth biggest, quickly following. At 16 percent, the rate is still a quarter of a point higher than it was during most of December and January.
Meanwhile, some other short-term rates also dropped. The average yield on three-month Treasury bills at the weekly auction fell to 12.058 percent, down from 12.450 percent last week. Other short-term rates generally were little changed yesterday, following substantial declines last Friday. Long-term rates, which have dropped significantly in the last few weeks, rose slightly.
The often volatile federal funds rate--the cost of money that banks borrow from each other to meet reserve requirements set by the Federal Reserve--was unchanged yesterday at about 13 1/2 percent, but that was down more than half a percentage point from last week's average level.
At the same time, the interest rate paid by major banks on large certificates of deposit dropped somewhat, with three-month CD's bringing 13 1/4 percent, the lowest level since the beginning of the year. Since such CD's are a significant source of lendable funds for the big banks, changes in interest rates paid on them usually precede changes in the prime.
Analysts are uncertain whether interest rates will continue to drop in coming weeks. However, credit markets are clearly under less pressure than they have been since the beginning of the year, analysts said.
The easing flowed from two sources: First, the demand for business credit, which began to rise sharply in mid-January, has turned flat once more. Second, an unexpected bulge in the money supply, which had prompted the Federal Reserve to tighten credit conditions somewhat, largely disappeared with a $3 billion contraction last week.
One group of financial market analysts believes the Fed now has money growth enough under control that it can allow short-term interest rates to decline without endangering its chances of meeting its restrictive money growth targets for the year.
Some other analysts think the Fed will be very cautious and hold rates near their current levels because April and May have for the last several years consistently been periods of strong money growth. Key Federal Reserve officials are known to be concerned about this seasonal bulge.
While many analysts have drawn a link between the surge in money growth and the run-up in short-term interest rates, fewer have charted the very large jump in business credit demand that, uncharacteristically, occurred in the middle of a recession. Commercial and industrial loans at large banks, which report data to the Fed weekly, rose as much in the first six weeks of this year as they did in the last five months of 1981.