Bank customers with loans pegged to the prime rate are about to feel the impact of the rising cost of money, but economists say a big increase in interest rates is unlikely this year.
The first spike in the prime rate since the October stock market crash was announced Wednesday by major banks, a rise from 8.5 percent to 9 percent that heralded a period of more expensive loans for purchases ranging from plant machinery to homes and cars.The prime rate reflects the banks' costs of borrowing money and trails more subtle increases in other interest rates. But the rate is watched closely because bankers use it as a basis for calculating loans to businesses and for determining many types of fixed and adjustable-rate consumer loans, including home-equity loans.
Stock traders reacted badly to the rate rise, partly because it aroused memories of the higher interest rates that preceded the stock crash. The Dow Jones industrial average fell 37.80 points to a three-month low of 1,965.85.
But many economists said they didn't believe interest rates would rise much further, largely because the economy could stumble badly if borrowing costs increased substantially.
These economists argue that Federal Reserve Chairman Alan Greenspan, a Reagan administration appointee who has wide power to influence interest rates, doesn't want to make any sudden or aggressive moves to tighten credit, especially in an election year.
But the Fed also wants to heed inflationary warning signs that have appeared, notably a 14-year low in the unemployment rate reported by the Labor Department last week.
"It wants to tap the brakes a little bit rather than slam them on in a great fury," said Robert Brusca, chief economist for Nikko Securities International Inc. in New York.
John Wilson, chief economist at Bank of America in San Francisco, said "clearly, we're on an upward move in interest rates and they'll continue to move upward. But I think they'll flatten out."
David Blitzer, chief economist for Standard & Poor's Corp., the investment research and credit-rating concern, said he believed the prime rate would stay at 9 percent for a number of weeks, possibly moving to 9.5 percent by June.
But Blitzer said he didn't believe the Fed would move to nudge rates much higher than they are now.
"I think this year, the Fed wants to keep the economy growing," he said.