Tuesday, September 29, 1998

Potential interest rate cut could spur spending

By DOUG WILLIAMSON

Business Editor

The Federal Reserve is expected today to lower the interest rate it charges banks for short-term funds.

Such action could spell lower rates for consumers.

"It would be a breath of fresh air," said Scotty Lindley of the Abilene branch of First National Bank of Baird. "It would boost consumer confidence if the rates come down."

Marv Gerard of the Abilene Board of Realtors said a cut in the short-term rates "may or may not affect long-term rates on mortgages. The rates are very good right now. We are in a wonderful situation for everyone." Many 30-year loans are going for 6.5 percent, and some 15-year mortgages are as low as a little more than 6 percent.

Gerard said the local housing market has begun its cyclical decline in sales. Traditionally, from August to the first of the year, sales slump a little. They begin climbing again in January, he said.

"This (potential cut) may trigger that comeback a little early," Gerard said.

Questions about when rates might go up would be answered, and that could spur some consumer spending, Lindley said.

Lower rates may not affect the automobile sales business.

"With the special programs we have already, I don't know if it will help," said Cliff White of White Chrysler Plymouth Jeep Eagle. "We have programs for 1.9 and 2.9 percent. Our highest is 5.9 on 60-month loans."

Even if customers would rather take the cash-back offer, White said he can easily secure financing for them at 7.75 percent.

"For the people who insist on using their credit unions, it might help there. Some of the banks might lower their rates," he said.

As for the used car business, Cal Sumrall of Cal's Auto Sales said a Fed rate cut will have little effect. Most financing for older-model cars is done in-house, he said.

"It will mean something to the later model segment of the industry, those cars which are five years old and newer," Sumrall said.

With rumors of the prospective cut flying Monday, private economists wondered how much success any cut would have in containing a financial crisis that so far has proven unstoppable and now threatens more countries, including Brazil.

"A Fed rate cut will help undergird a deteriorating global economic situation. But it isn't a magic bullet," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Many hope a rate cut would serve as a badly needed confidence booster, demonstrating that U.S. authorities will do whatever is necessary to keep the American economy - the world's largest - growing so it can serve as a market-of-last resort for other troubled countries.

"A Fed rate cut won't save the world, but it will start a process that will keep the U.S. economy from weakening a lot more - something that would be deadly for the world," said Allen Sinai, chief economist at Primark Decision Economics.

Last week, Greenspan assured a congressional hearing that Fed policy makers understand the need to act quickly "to prevent the contagion from really spilling over and creating some very significant further difficulties for all of us."

Those comments were read by some as a signal that the central bank won't stop with the usual quarter-point cut but will lower rates by a bolder half-point.

"What is needed is more than a symbolic action of a quarter point," former Labor Secretary Robert Reich said Monday. He urged at least a half-point cut as a "pre-emptive strike" against the threat of global deflation, something the world hasn't seen since the Great Depression of the 1930s.

The Fed last cut rates on Jan. 31, 1996, the final in a series of three quarter-point moves to stimulate domestic demand and keep the U.S. economy out of recession.

The federal funds rate, which is used by commercial banks as a benchmark to determine the interest charges paid by millions of consumers and businesses on short-term debt, was last changed on March 25, 1996, when it was raised a quarter-point to 5.5 percent because of inflation worries.

The Associated Press also contributed to this article.

Doug Williamson can be reached at 676-6707 or williamsond@abinews.com.