Economists See Interest Rates Heading Higher by 1987 / after Going Slightly Lower in Coming Months

Article excerpt

WASHINGTON (AP) - Interest rates, which have fallen to their lowest levels of this decade, may not go much lower and may actually start heading higher before the year is out, many economists believe.

While that sounds like an overly pessimistic prediction given the dramatic plunge in rates so far this year, many analysts feel the events that have been driving rates down have about run their course.

But even the most pessimistic feel that rates will edge slightly lower in coming months given the momentum already built into the system.

Signs of that came Monday with announcements from many of the nation's largest banks that they are reducing their prime rate from 9 percent to 8.5 percent.

The cut in the banks' loan rate for their most creditworthy customers was effective immediately and followed the Federal Reserve Board's Friday reduction of its discount rate from 7 percent to 6.5 percent.

Monday's announcements came from No. 1 Citibank, No. 3 Chase Manhattan, No. 5 Morgan Guaranty Trust, No. 8 Bankers Trust and No. 9 First National Bank of Chicago, among others.

A reduction in the discount rate is the most dramatic move the Fed can make to signal its intention to push interest rates lower.

But in the view of many analysts, the Fed action was the final salvo in the current round of rate reductions. They believe a reviving economy in the second half of the year will force the Fed to tighten its control over money growth in order to insure that inflation does not return.

Some had argued that worry over unusually sluggish economic growth would prompt the Fed to follow up the latest cut in the discount rate within weeks with another reduction to 6 percent.

But the government reported Thursday that the overall economy, as measured by the gross national product, was rising at an annual rate of 3.2 percent in the first three months of this year, substantially stronger than a 0.7 percent rate of expansion from October through December.

""The signs of life in the economy suggest that any further cut in the discount rate will be a long time in coming if it comes at all,'' said Allen Sinai, chief economist for Shearson Lehman Brothers.

Sinai said a cut in the prime rate from the current 9 percent to 8. …

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