U.S. Banks Follow Fed in Raising A Key Lending Rate

U.S. lenders said they would start raising rates on some loans after the Federal Reserve announced on Wednesday that it would lift its own interest-rate target by a quarter percentage point.

J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and a number of other banks all announced increases to the so-called prime rate, a key reference rate for a variety of loans including credit-card debt. The prime hikes reflected the Fed's historic but measured move to increase its target rate above zero.

The prime rate, which usually hovers above the Fed Funds rate, will go to 3.5% from 3.25%. Other banks that announced the move included U.S. Bancorp, PNC Financial Services Group Inc. and M&T Bank Corp. Most of the banks said the move would occur Thursday. Bank of America said it would increase its prime rate immediately.

Other banks are expected to follow suit with prime rate increases. The hikes will be reflected in the corporate and consumer loans at banks have pegged to that rate. The benchmark is used for everything from credit cards to home equity lines of credit.

But savers will likely have to wait for deposit-rate hikes to materialize. The banks Wednesday didn't announce any corresponding increases in deposit rates. In a rising rate environment, deposit-rate hikes typically lag behind increases in loan rates, which is why banks can make more money when rates go up.

In periods of rate increases by the Fed over the last two decades, the average interest paid on deposits rose by only about 0.25 percentage point over the first year, according to data provided earlier this year by Bankrate.com. Over the same period, the rates on 30-year fixed-rate mortgages increased by more than twice as much, and the prime rate rose by eight times as much.

In 2006, banks passed along 17% of the increase in rates to depositors over the next year, said Erika Najarian, head of U.S. banks equity research at Bank of America Corp.'s BofA Merrill Lynch Global Research.

Some experts say that savers may see more of a deposit-rate increase this time around than they have in the past, due in part to new rules that make banks want to hold onto certain deposits.

By Rachel Louise Ensign