U.S. BANKS LIKELY TO LIFT PRIME RATES AGAIN SOON Major U.S. banks may lift prime lending rates again within days due to recent increases in their borrowing costs and speculation the Federal Reserve is nudging up interest rates to help the dollar, economists said. In what was the first prime rate boost since mid-1984, most banks in early April lifted their rates a quarter point to 7-3/4 pct, citing a reduced gap between the prime and their own cost of money. That spread has narrowed again. "A prime rate increase could happen as soon as tonight," said Robert Brusca of Nikko Securities Co International Inc. Brusca said a quarter-point prime rate rise to eight pct is justified because the spread between banks' cost of funds and the prime rate has narrowed to less than three quarters of a percentage point. He said that spread had averaged around 1.4 percentage points since last October until it fell below one point and triggered the April prime rate rise at most banks. "We could easily have another prime rate increase as soon as this week," said David Jones of Aubrey G. Lanston and Co. "We've got a fairly good chance of a prime rate rise in the near future," said Allan Leslie of Discount Corp. "Based on the spread between the prime rate and funding costs, you would ordinarily see a prime rate increase now," said Harold Nathan, economist at Wells Fargo Bank. However, he said banks may be reluctant to lift the prime because that would dampen already fairly weak business loan demand and because some are not sure the Fed will maintain recent upward pressure on money market interest rates. Nathan believes the Fed has let market pressures lift short-term rates in recent days to help the ailing dollar. He said "if there is widespread belief money market rates will stay high, a prime rate rise could occur at any time." Fed officials have long expressed concern that too steep a dollar drop could help rekindle U.S. inflation. As the dollar fell to a 40-year low against the yen Friday, currency traders said the Fed and other central banks supported the dollar. In addition to buying dollars outright, another way to stabilize the U.S. currency would be for the Fed to push U.S. interest rates higher relative to overseas rates. Based particularly on the Fed's reserve management actions on Friday and today, Nathan of Wells Fargo said "it has become clear that the Fed is not fully resisting upward rate pressure in the market. It is supplying fewer reserves than are needed." Bank funding costs and other short and long-term interest rates rose sharply Friday and today on heightened speculation that the Fed is gently firming monetary policy. That was because the Fed supplied far fewer reserves in the market than most economists had expected. On Friday, the Fed added reserves indirectly and in small amounts via one billion dlrs of customer repurchase agreements with the Federal funds rate at which banks lend to one another high at 6-5/16 pct. With funds trading even higher at 6-1/2 pct today, the Fed arranged only a slightly larger 1.5 billion dlr round of customer repurchase agreements. "The Fed's actions on Friday and today show that it is offering only token resistance to upward funds rate pressures," said Jones of Lanston. "The Fed is focusing its policy attention mainly on the need to defend the dollar," Jones said. He believes it is merely shading policy toward restraint now, "but to have a major impact on the dollar, the Fed will have to tighten policy overtly at some point." Jones expects the Fed to foster higher market rates by becoming more restrictive in supplying reserves and, within four to six weeks, to raise its discount rate from 5-1/2 pct. Jones said a U.S. discount rate increase to six pct might well be accompanied by West German and Japanese rate cuts to further aid the dollar. Given likely Fed policy firming, he said both the yield on 30-year Treasury bonds (about 8.30 pct now) and the prime rate may be at 8-1/2 pct at end-June and nine pct by year's end. "The jury is still out on whether the Fed is tightening policy to defend the dollar," said Leslie of Discount Corp. He said tax-date pressures have been pushing up Fed funds lately. Leslie said Fed actions and reserve data once these pressures abate will show whether or not it is firming policy.