Fed's move won't awaken sleepy economy, experts say Cut in the discount rate is predicted to have only a negligible impact.

November 07, 1991|By Jon Morgan | Jon Morgan,Evening Sun Staff Staff writer Ross Hetrick contributed to this story.

The Fed has spoken. But is anybody listening?

Trying to awaken an economy that appears to be in a deep sleep, the Federal Reserve Board yesterday pushed its key bank lending rate from 5.0 percent to 4.5 percent, the lowest level in 18 years.

Ordinarily, such a rate cut would make available cheaper credit to consumers and spark new buying and new economic energy.

Or, so the theory goes.

But experts say yesterday's rate cut -- the fourth this year by the nation's central bank -- may not have the impact for which policy makers had hoped.

For one thing, federal lending rates may already be so low that further cuts will have a negligible impact. And, while several major banks lowered their prime lending rates in response, such moves do not guarantee immediate drops in rates that banks charge consumers for car loans and credit cards.

Even more worrisome: Economists, while generally applauding the Fed's move, said it may provide evidence 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, a unit of Washington-based Ferris Baker Watts.

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.

RF "I think we're paying the price for our indulgences in debt during

the '80s," Sulvetta said.

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.

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.

"The consumer's picking up the tab for the banks' mistakes," he said.

Bankers generally reject this view, saying that consumer loans have longer durations than commercial ones and cost more to process.

"Most of the rates on car loans are fast coming down," said Daniel Finney, spokesman for MNC Financial, parent company of Maryland National Bank, the state's largest.

The bank's consumer rates are based on factors other than just the prime, he said.

He said the bank, like most of its competitors, would probably lower its prime rate to match the large, money-center banks. Signet Bank announced yesterday that its prime rate had been lowered to 7.5 percent.

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.

For that matter, the economic impact on Maryland may be less than that on other states because so many Marylanders work in service businesses. The cost of borrowing is more important to manufacturing companies that invest more in plant and equipment, he said.

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 is because mortgages are for periods of up to 30 years and lenders are reluctant to change their rates quickly and risk the LTC possibility of rates going back up, he said.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.