Magazine article American Banker

Downward Trend Seen in Prime Rates

Magazine article American Banker

Downward Trend Seen in Prime Rates

Article excerpt

Downward Trend Seen in Prime Rates

With the fed funds rate clearly cut by 25 basis points Thursday, observers expected banks to reduce their prime lending rates as well.

"I think there is a prime-rate cut in the works," said Gary Ciminero, chief economist of the Fleet/Norstar Financial Group.

The prime-rate easing is generally expected to be a modest one, to 7.75% from 8% - a step that First Fidelity Bank, Lawrenceville, N.J., has already taken.

Foreshadowing Move on Prime?

A cut in the fed funds rate is generally seen as a shot across the bow of the prime lending rate, the benchmark for many commercial and consumer loans.

In recent rounds of prime-rate cuts, banks have waited until the first of the month to move, which lets them leave floating-rate loans pegged to the prime at a higher level for up to a month.

Money-center banks, which normally cut interest rates first, would not comment on their plans.

Still, it was nearly unthinkable that the prime lending rate would remain at 8%, if for no other reason than the political pressure from the White House. President Bush has made clear his determination to end the so-called credit crunch.

Eyes on Discount Rate

Should the Federal Reserve take the added step of reducing the discount rate it charges on bank borrowings, the move would surely trigger cuts in the prime rate. A discount rate cut could occur as early as today, after release of October's employment data.

But in any case, the outcome is far from certain.

Bankers tend to doubt that a lower prime rate would ignite loan demand. Recent evidence supports this view. Banks trimmed their prime rates from 8.5% in mid-September in lockstep with the Fed's announcement of a cut in the discount rate. Yet loan demand remained anemic.

But a prime-rate cut is what the Fed wants, observers said. …

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