Consumers get break from Fed Rate cut for banks expected to lower cost of borrowing

'Make people feel better'

Monetary policy

September 30, 1998|By Mark Guidera and Shanon D. Murray | Mark Guidera and Shanon D. Murray,SUN STAFF

Should consumers expect a better deal on home equity loans and other banking needs now that the Federal Reserve has trimmed short-term interest rates?

You bet, say banking experts.

Yesterday's decision by the Federal Reserve to reduce the overnight federal funds rate, the first such reduction since January 1996, should be reflected within days in the rates the nation's largest banks charge their best business customers.

That rate cut should quickly prompt regional and local banks to follow suit, cutting interest rates on a wide range of consumer and business loans, from auto loans to mortgage and home equity rates to credit cards, observers said.

"The Fed has thrown the first stone in the pond. It should ripple right through the economy," said Wayne Kirwan, a spokesman for the Maryland Bankers Association.

"The first thing it should affect are mortgage rates. They are already really low. Any lower and we could be looking at an extraordinary rate on home loans."

The average interest rate on a 30-year fixed-rate home loan in the Baltimore area was 6.67 percent at the end of last week, according to HSH Associates, which tracks mortgage rates.

Federal Reserve policy-makers cut short-term interest rates by a quarter-percentage point to 5.25 percent from 5.5 percent. The move is aimed at cushioning the U.S. economy from financial turmoil around the globe.

John Bond, president of Columbia Bank, which operates eight banking offices in Howard and Baltimore counties and Baltimore City, is among those banking executives who will be watching how competitors respond to the Fed's move before setting new lending rates.

The most likely customers affected would be commercial loan customers and those with home-equity loans, which are tied to ** the prime interest rate, Bond said.

But he does not expect the Fed's action to stimulate a surge in lending or other economic activity, because low interest rates have been available for some time.

"It's already pretty competitive. There are a lot of good deals out there on home equity rates and other loans," said Bond.

"And the housing market has had incredible rates available for some time. You have to ask, 'How much better can it get?' "

"The biggest factor from this move is probably going to be a psychological one," Bond added. "It will make people feel better about the way things are going."

Businesses from car dealers to clothing retailers hope that psychological boost coupled with added money available for spending as a result of lower payments on credit cards and other loans translates into more eager shoppers.

"I don't know what a quarter of a point may do, but I'm hoping it helps everyone's attitudes and makes them walk through my doors," said Owen Duffy, sales manager for Brooks BMW in Towson.

Angel Casas, sales manager at Acura West in Ellicott City, was more sanguine.

"They can cut the interest rate all day long, but what rate you receive is predicated on your credit history. The cut in the interest rate may bring more people through the door, but they'll get a special rate only if they have a good credit history."

Maryland banks last week were charging between 7.25 percent and 8.75 percent on new-car loans.

Stuart Wallace, general sales manager with Antwerpen Automotive Group in Randallstown, agreed with Casas. "The car market isn't based on interest rates. That's not driving sales. It's car payments, what people can afford."

Pub Date: 9/30/98

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