A group of bank economists urged the Federal Reserve Board Thursday to raise short-term interest rates this summer by a quarter point.
"We don't think a large increase is needed," said Joel L. Naroff, chairman of the American Bankers Association's Economic Advisory Committee. "But if the Fed touches the brakes a little bit more it can extend growth through all of 1998."
The Federal Open Market Committee meets July 1 and 2 to consider raising the Fed funds target rate. It last raised rates in March with a 25-basis- point hike.
Mr. Naroff, who is also chief bank economist at First Union Corp., said the nine-member committee expects the Fed to leave rates unchanged next week but raise them at its Aug. 6 meeting.
"If the Fed waits an extended amount of time, then we get in a situation where we could have a sharp rise in rates," sparking a recession, he said.
The economists also predicted that banks will continue to post record profits. The growing economy increases demand for consumer and business loans, and leaves borrowers better able to repay their debts, Mr. Naroff said. "The key is to continue the recovery so bank profits can continue to grow moderately," he said.
Wayne M. Ayers, chief economist at BankBoston, said a slight rate hike also would boost bank profits because rates on loans reprice quicker than rates on deposits.
Overall, the bank economists expect gross domestic product to rise 5.3% in 1997 and 4.3% in 1998 while inflation hits 2.6% this year and 2.9% next year.
The committee forecast consumer installment credit will grow 5.5% this year and 5.3% next year, but delinquency rates will either fall or remain steady. Growth for commercial and industrial loans will be strong, averaging 10% this year and 8% in 1998.
The prime rate should stand at 8.62% in the third quarter before rising to 8.75% in the fourth quarter.
The committee does not expect the prime rate to fall until the third quarter of 1998.
ABA's committee of bank economists meets twice a year to develop a consensus economic forecast, which it then shares with Fed policymakers.