Banks Raise Prime to 9% In Wake of Fed's Tightening

The nation's central bank raised short-term interest rates again on Wednesday in its ongoing effort to slow the economy and thwart inflation.

Commercial banks quickly reacted to the Federal Reserve System's move by increasing their prime lending rate to 9% from 8.50%.

Leading the way among the banks were Chase Manhattan Corp., Citicorp, and Norwest Corp. By late afternoon, many other major institutions had followed suit.

The bank prime rate was last at 9% in May 1991. A year ago the rate was only 6%.

The Fed said it was hiking both its target for the federal funds rate and the discount rate by a half point. The moves were widely anticipated by both banks and the financial markets.

Federal funds, the overnight loan rate on bank reserves, is now 6% and the discount rate on loans to Fed member banks is 5.25%. A year ago both rates were 3%.

Outlining its rationale for the rate increases, the central bank said after a session of its policymaking Federal Open Market Committee:

"Despite tentative signs of some moderation in growth, economic activity has continued to advance at a substantial pace, while resource utilization has risen further.

"In these circumstances, the Federal Reserve views these actions as necessary to keep inflation contained, and thereby foster sustainable economic growth."

Assessing the statement, Eugene J. Sherman of M.A. Schapiro & Co., New York, noted that the Fed set "no time horizon" for further rate actions and thus preserved all its options for the future.

That was in contrast to its statement after a rate hike last August, when the central bank prompted considerable speculation by saying its move then would likely be "sufficient for a time."

Mr. Sherman said he feels there will be no increase in rates at the next session of the monetary policy group on March 28. Instead, he expects another half-point rise at the meeting on May 23.

Analysts and economists said the latest rate increases will further flatten the Treasury yield curve, a much-watched indicator of the economy's strength and of banks' earning potential.

It was the seventh credit tightening move by the Fed in a year-long campaign to slow the economy's rate of growth and combat any return of inflation or inflationary expectations.

The Fed began altering its accommodative credit stance last Feb. 4 by pushing up its desired federal funds rate by 25 basis points to 3.25%. The target rate was lifted another 50 basis points over the next 10 weeks in two stages' on March 22 and April 18.

But the economy remained strong, and the Fed acted more boldly on May 17, raising both the funds rate and the discount rate by 50 basis points. It did so again on Aug. 16.

Then last Nov. 15, the central bank tightened yet more sharply with 75- basis-point increases in the two rates.

The latest Fed's action drew the sharpest responses yet from its critics.

Economist David Levy of Bard College, Annandale, N.Y., asserted that the Fed was "gripped with a fear of inflation far out of proportion to the dangers." Mr. Levy edits a report on business conditions called "Industry Forecast."

Rep. Richard Gephardt, D-Mo., the House minority leader, said the Fed was not taking account of the nation's position in the global economy. He termed the rate hikes a "very damaging" move that could "kill the economy."

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