Fed action spurs several banks to cut prime rates.

FED SLASHES DISCOUNT RATE

November 06, 1991|By Jon Morgan | Jon Morgan,Evening Sun Staff

The Federal Reserve Board, trying to prod the nation's sluggish economy, today slashed its key bank lending rate from 5.0 percent to 4.5 percent, the lowest level in 18 years.

But don't expect the good times to rush back.

Experts say federal lending rates may already be so low that further cuts will have a negligible impact. And while several major banks today lowered their prime lending rates, such moves do not guarantee immediate drops in rates that banks charge consumers for car loans and credit cards. More worrisome is that economists, while generally applauding the Fed's move, expressed concern that it will have little impact on the nation's economy and will provide evidence that the government has run out of things to do to spur expansion.

"The levers have been pulled and nothing is happening," said Anthony Sulvetta, managing director of FBW Investment Management of Washington.

In past recessions, the government has been able to launch large public works projects or take other action to inject money into the economy and, in the words of economists, "prime the pump."

But with the federal deficit already at record levels, the government can ill afford such an effort now. Similarly, many consumers have taken on so much debt that cheaper rates may not encourage them to borrow.

"I think we're paying the price for our indulgences in debt during the '80s," Sulvetta said. Although he applauds the discount rate cut, he said, "I don't think it's going to matter. . . . I think we've bottomed out and will go along the bottom for a while longer."

Mark Meador, an economist with Loyola University, agreed that the economy is already improving and that a rate cut now is likely to have only a slight psychological impact. "Perhaps this will brighten up the party a little bit. I don't think there's much else they can do."

The discount rate is the interest on loans the Fed makes to commercial banks. In theory, lowering it should set off a ripple of lower interest rates to consumers and stimulate the economy.

Shortly after the announcement, major banks led by J.P. Morgan lowered their prime lending rate to 7.50 percent from 8.0 percent. It was the fifth decline this year and the lowest level since 1986.

F: The prime rate is the interest a bank charges its best

customers and is often a benchmark for other loan rates. But over the past year, banks have shown reluctance to cut rates to consumers despite paying less to savers and holders of certificates of deposit.

"The persistent myth is that a cut in the prime rate means relief for consumer rates," said Robert K. Heady, publisher of Bank Rate Monitor, a consumer-oriented newsletter based in Florida.

He said that by paying high rates on car and other loans, consumers are making up for losses the banks are suffering from commercial and real estate loans.

If banks would lower their consumer rates, that would encourage more spending and help boost the economy, he said.

Maryland National Bank, the state's largest, was today considering lowering its prime rate in response to the Fed's move. A spokesman, Daniel Finney, said the bank's consumer rates have also fallen, but they are based on factors other than just the prime rate.

Businesses may be cheered somewhat by the drop in the prime rate, but few are likely to rush out and borrow money for expansion until the demand for their products improves, said Charles R. Margenthaler, dean of the Sellinger School of Business at Loyola.

Potential homebuyers should not expect an immediate drop in mortgage rates, according to Theodore E. Reichhart Jr., executive vice president of Maryland National Mortgage Corp., a subsidiary of MNC Corp., parent of Maryland National Bank. This because mortgages are for periods of up to 30 years and lenders are reluctant to change their rates quickly and risk the possibility of rates going back up, he said.

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