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Wells Fargo Cuts Its Prime Rate to 7 1/2% From 8% : First Major Lender to Follow Federal Reserve's Reduction of Discount Rate

August 26, 1986|JOHN M. BRODER | Times Staff Writer

Wells Fargo Bank late Thursday lowered its prime lending rate to 7 1/2% from 8%, making it the first major bank in the nation to drop interest charges following last week's Federal Reserve Board discount rate cut.

On Wednesday, the Fed reduced its discount rate, charged on loans to member banks, to 5.5% from 6%, the fourth cut in the bellwether rate this year.

The Fed has been prompted to make cuts in hopes of stimulating a weak U.S. economy. The Commerce Department recently reported that the gross national product grew at an annual rate of only 0.6% in the second quarter. At the same time, wholesale prices are falling sharply and inflation in consumer goods is negligible.

Commercial banks generally respond quickly to such signals from the Fed. Wells Fargo was the first to act, but other major banks are expected to follow soon. The cut in the prime rate, announced Thursday afternoon, was unusual in that a West Coast bank was the first major institution to act.

Takes Effect Today

Southwest Bank of St. Louis, a small bank that is often a rate trend-setter, cut its prime rate to 7 1/2% on the same day that the Fed cut the discount rate, but other banks apparently waited for a major institution to move first.

Wells Fargo, the nation's seventh-largest bank, said its new lower prime rate would take effect today.

The prime rate, which has fallen four times this year in half-percentage-point increments, was last cut July 11. It has not been as low as 7 1/2% since October, 1977.

The prime--or reference--rate is the benchmark that banks use to set borrowing costs for business customers. The best corporate borrowers pay the prime rate or a little less, while firms considered more risky pay a premium above prime.

Consumer rates, although not tied directly to the prime, tend to move in the same direction but more slowly. Mortgage, auto and personal loan rates have been falling this year, and bankers said they expect them to continue to edge downward.

Harold C. Nathan, Wells Fargo's senior financial economist, said the latest reduction in the prime rate was inevitable, given sluggish economic growth and stagnant corporate borrowing.

He said he believes that lower interest rates will stimulate the economy, "but it will be hard to trace."

Nathan added that a cut in the prime rate "means a decrease in interest costs, for large corporations down to small businesses. It's an important rate in that it's newsworthy and an indication to the general public that rates are indeed continuing to decline."

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