If the Fed Eases, Prime Will Follow, Analysts Predict
NEW YORK - If the Federal Reserve eases monetary policy, as is widely expected, U.S. banks won't wait long to reduce the prime rate, analysts said.
But they stressed that coaxing the prime lower would require easing of both the discount rate and the federal funds rate, now both at 5.5%. The prime has been at 8.5% since early May, when it was cut 50 basis points.
Even if both federal rates were reduced, some analysts argued, some banks might trim their primes by 25 basis points while more aggressive banks cut by 50.
Margins Seen as Wide
James Solloway, director of economic research at Argus Research Corp., predicts a quick prime-rate reduction when the Fed moves. The banks "have a fairly large profit margin as it is, and I think that a reduction in the cost of borrowing for them will be quickly pushed through to the retail level."
The usual spread between the prime and federal funds rates is 150 to 200 basis points.
The current 300-point spread, analysts said, reflects a higher cost of doing business, including higher deposit insurance premiums and greater capital levels held against loan losses.