Newspaper article St Louis Post-Dispatch (MO)

Prime Jumps as Fed Nudges Interest Rates

Newspaper article St Louis Post-Dispatch (MO)

Prime Jumps as Fed Nudges Interest Rates

Article excerpt

Big banks hiked the prime lending rate by half a percentage point Monday. Stock prices skidded and bonds plunged as the Federal Reserve once again tapped the brakes on the U.S. economic engine.

Consumers can expect higher interest on home equity loans, many credit cards and other forms of consumer debt. Savers may reap a slightly higher return on savings accounts and money market funds.

Three of the nation's biggest banks boosted their prime rates to 6.75 from 6.25 percent. If other banks follow, it will be the second prime hike in less than a month.

The banks acted after the Federal Reserve on Monday shoved the Federal Funds rate to 3.75 percent from 3.5 percent. It was the third hike since Feb. 4, when the key short-term interest rate was at 3 percent. The fed funds rate is the rate banks charge each other for short-term loans. The Fed regulates the rate by adding or draining funds from the banking system.

The Fed is trying to keep the economy from overheating and firing up inflation, analysts said.

The move to raise short-term rates spooked bond traders. They dumped bonds and set long-term rates on the rise as well.

The yield on the bellwether 30-year Treasury bond rose a tenth of a percentage point to 7.41 percent - a 15-month high.

That should mean slightly higher mortgage rates as soon as today.

By late afternoon, banking giants Citibank, BancOne, and Chemical Bank had increased their prime rates. The prime is the benchmark business lending rate, but in recent years it has affected some consumer rates.

Many home equity loans and variable-rate credit cards are linked to the prime. Banks last raised the prime on March 23, when it climbed to 6.25 from 6 percent. That was the first increase in five years.

St. Louis banks generally follow major banks nationwide in raising the prime but had not announced any increases Monday.

The stock market caught the interest rate flu as the Dow Jones Industrial Average lost 41 points to close at 3,630, a 1.1 percent decline.

Higher rates hurt stock prices by crimping corporate profits and by making bond yields look more attractive when compared with stocks. …

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