Wednesday, December 17, 1997

Fed leaves interest rates alone

By DOUG WILLIAMSON / Business Editor

The Federal Reserve gave local lenders an early Christmas present Tuesday.

The central bank's Open Market Committee did not fiddle with the benchmark rate on overnight loans between banks. It stays at 5.5 percent for the ninth month.

"That means loan rates will not go up locally," said Scotty Lindley of the Abilene branch of First National Bank of Baird.

John Combs of NationsBank in Abilene agreed, saying borrowing should remain strong.

"The economy is strong. Our bank has had an outstanding year, a real good year, thanks to rates," Combs said.

Lindley is pleased, but takes the news with a pinch of salt.

"It appears things are strong, but consumers don't have any money," Lindley said. "Bankruptcies are up. Past dues are up. Credit card past dues are climbing."

He blames the negatives on credit card companies that are saturating the market with low-interest rate, high credit limit offers.

The monetary policy committee had several issues to juggle. It played it safe, balancing a strong economy and fragile financial markets oversees. An increase in the rates probably would weaken Asian currencies in comparison to the dollar.

"Their No. 1 concern is the fallout from Asia. They're not going to move as long as Asian financial markets remain as fragile as they are today," said economist Mark Zandi of Regional Financial Associates in West Chester, Pa.

The stock market extended its recovery from last week's sell-off. Just before the Fed announcement, the Dow Jones average of industrial stocks was up 67 points. It closed up 53.72 points at 7,976.31.

The Fed might have moved in with higher rates if it were not for the tension in Asian markets, several analysts said.

Economist Robert Brusca of Nikko Securities Co. International Inc. in New York predicted the Fed will wait until either of its next two meetings, on Feb. 3-4 or March 31, before increasing rates.

"The Fed's willing to wait, but it's waiting in a very nervous fashion," he said. "Right now they're in the middle of everything unraveling. The smoke will clear during the first quarter."

Some economists predict the next move will be to lower interest rates because inflation has been calm and it should not take much to keep it that way.

"Ultimately, we believe the deflationary environment will lead the Fed to ease policy," said economist Bruce Steinberg of Merrill Lynch. "Those worried about inflation are fighting the last war."