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Fed's rate hike raises anxiety

April 14, 1997

By ELLEN LYON

Staff Writer

Five years ago Jerry Keller accepted a buyout from the Bell Atlantic office in Hagerstown, put the money in an IRA and invested it in the stock market.

Since then Keller, who now lives in Loudoun County, Va., said his retirement fund has done "fairly well," and he's earned an average return on his money of about 17 percent.

Not long after the Federal Reserve nudged interest rates up a quarter of a point at the end of March, Keller checked his investments and found he had lost $29,000, he said.

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Keller, who said he has learned the hard way not to panic over daily fluctuations in the market, checked again a few days later and found he had picked up $3,200, he said.

The Federal Reserve, the nation's central bank, increased the federal funds rate - the interest rate at which banks lend money to each other - by a quarter-point. The move was billed as a preemptive strike against the threat of inflation in what the Federal Reserve considers to be an overheated economy, Frostburg State University Economist Margaret Dalton said.

In response, banks raised their prime lending rate to customers.

Significant and continuing increases in interest rates can have multiple repercussions on the economy.

Businesses may decide not to borrow money to expand and add more jobs. Or they may decide to borrow but raise the price of their products to make up for the extra cost.

Mortgages and loans cost more as interest rates go up.

For instance, the variable interest rate on the second mortgage Keller took out to pay for his children's college educations has jumped from 10 percent to 10 1/4 percent in the last month, he said.

Keller said he doesn't see the need for the action taken by the Federal Reserve.

"I didn't think inflation was that bad," Keller said. "I don't understand their reasoning behind it."

Several Tri-State area bankers, stockbrokers and business leaders also disagreed with the Federal Reserve's assessment of the economy.

"We've got enthusiasm now, optimism now. I don't think it's overheated," Joseph Shull, president of Grove Crane in Shady Grove, Pa., said.

"I do not see any significant inflation. I don't see any need to raise (interest rates) at all. As a matter of fact, I'd like them to lower it," said Jim Blanks, president of Antietam Equipment Corp. on Jefferson Boulevard.

Bill Hatcher, of Ferris Baker Watts Inc. in Hagerstown, said stockbrokers "as a group, don't see a need to be tampering with interest rates. It just causes people to freak out."

"Why raise rates and make money harder to borrow for corporations that are doing well?" Hatcher said. "I've had a great many phone calls just wondering if everything's OK ... I see no reason for any panic. Nothing is out of whack."

The Federal Reserve's "correction" to the economy has wiped out the average 10 percent gain of mutual funds since January, he said.

However, for investors such as Keller, who are more interested in long-range performance, the market has done well over the last three years and "a correction is only negative over the short haul," Hatcher said.

"When the economy is expanding as long as this one has, the expectation is inflation will rise," Frostburg State's Dalton said.

Inflation occurs when all available workers are employed but the demand for goods and services continues to rise, further driving up the demand for workers and higher wages, Dalton said.

"What we've seen in this economy is a rising demand for goods and services" but without an increase in the demand for higher wages, she said.

Dalton said she isn't sure why that is, but speculated that labor might feel insecure about demanding higher wages because of the economic turnovers and job losses of recent years.

Increases in wages are not inflationary if they are followed by gains in productivity, Suzanne Hayes, of the investment firm Wheat First Butcher Singer in Hagerstown, said.

There is some pressure on wages in some parts of the economy, like the automobile manufacturing industry, but not here, Hayes said.

So far the quarter-point increase has had little impact on business, according to local banks and mortgage companies.

The economy remains good and some people in the market for homes have stepped up their searches in case interest rates continue to rise, said Jay McDowell, president of Morgan-Bell Mortgage Corp. in Hagerstown.

Chambersburg Trust bank has seen an increase in applications for mortgages and home equity loans since March, G. Edward Horn, senior vice president and chief lending officer of the Franklin County, Pa.-based financial institution said.

"We haven't had any appreciable reaction from the consumer," Dave Barnhart, vice president of marketing at Hagerstown Trust, said. "We're just watching the market."

Looking ahead

Some national market analysts have predicted the Federal Reserve will boost interest rates two or three more times by the end of the year to slow the economy. That has some business leaders worried.

Shull said March's quarter-point increase has had no impact on Grove Crane, because the company's health is linked to the construction industry. But he said continuing hikes "would have a very detrimental effect" on the economy as a whole.

"We're all concerned that this first increase is going to lead to a second increase and a third increase," he said.

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