Key interest rate slashed to 27-year low Pot sweetens for business

December 21, 1991|By David Conn

Yesterday's move by the Federal Reserve Board to lower the discount rate won't have much effect on the J. J. Gloss Maytag Home Appliance center in Finksburg, because it doesn't offer financing to its customers, according to Manager Steve Harry.

But the reduction to 3.5 percent, soon may be felt in other ways. "I might actually go out and buy a house," Mr. Harry said, if long-term interest rates follow. "It sort of makes the pot a little sweeter."

That's exactly the reaction the Fed, and real estate agents, bankers and other mortgage lenders were hoping for when the rate dropped to its lowest level since 1964.

"It's going to ease the buyer's reluctance to purchase new homes," said Iris Rombro, senior vice president of Fairfax Mortgage Corp. of Towson.

"By spring our company feels that [mortgage rates] could be at the 7.5 percent range," Ms. Rombro said. And if that happens, "all those people who refinanced at 9.5 [percent in 1986] will refinance again. And it was a nightmare."

Although the long-term bond market always reacts more slowly than the short-term market, the timing of the rate cut means it could be felt quickly even for long-term bonds, according to Georgette Jared, vice president of Fairfax's secondary market department.

Last week, she said, bondholders went through a frenzy of selling in order to take their profits before the end of the year. That action drove down prices and boosted the interest rate of long-term bonds.

But come January investors will be buying again, Ms. Jared said, thus driving down rates just as the Fed's action begins to be felt. She predicted the Fed will cut the rate again in January.

William F. Treacy, chief economist at MNC Financial Inc., said long-term interest rates haven't fallen because "the people in the market just don't think the fundamentals [of the economy] have changed very much."

But he said some signs point to optimism, including an increase in the sale of durable goods in recent weeks. The discount rate cut will put more cash in the hands of borrowers with adjustable rate mortgages, and businesses that tend to hold variable-rate or very short-term loans.

"It's going to relieve some of the pressures that have caused businesses and consumers to be disciplined" about borrowing and spending, Mr. Treacy said.

Still, while some major banks quickly announced they would cut their prime lending rate, Baltimore-area banks were slow off the dime.

Officials at Maryland National Bank, First National Bank of Maryland, the Bank of Baltimore and Mercantile Safe-Deposit and Trust Co. said their institutions had made no decisions about whether and how much to lower their prime rate.

And auto dealers were pessimistic about the short-term impact on the economy. All the American carmakers are offering financing deals far below the prime rate of 7.5 percent, said Gary Hurley, owner of City Oldsmobile and immediate past president of the Maryland New Car and Truck Dealers Association.

The lower rate will help City Oldsmobile finance the purchase of its own inventory, Mr. Hurley added, but "it won't help the retail purchaser too much."

"I don't think that it's really a matter of the interest rate, as much as job security, layoffs," said David Rohlfing, sales manager of Jerry's Toyota in Baltimore.

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