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Interest rate cuts should 'trickle down' to consumers

October 02, 1998|By KERRY LYNN FRALEY

Consumers shouldn't expect a direct, immediate cut in mortgage rates because of the Fed's decision this week to cut a key federal interest rate, according to area bank officials.

But since such cuts usually are followed by small cuts in the prime rate, the benefits should trickle down, either directly or indirectly, according to Richard Phoebus, president of Home Federal Savings Bank in Hagerstown.

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Because many business loans adjust with the prime rate, there could be some reduction in the cost of doing business, which could result in lower prices for consumers, he said.

And a homeowner who has an adjustable-rate mortgage could have about $20 more a month to spend if the prime rate drops a corresponding quarter point, Phoebus said.

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But there no guarantees that rates on consumer loans will go down, he said.

"It's a piece of a puzzle that can be offset by other things in the economy. The biggest piece is consumer confidence," Phoebus said.

Most major banks did not immediately follow the Fed by cutting their prime rates, the interest they charge some of their most creditworthy customers.

One, Norwest in Minneapolis, did reduce its prime to 8.25 percent from the 8.5 percent that has prevailed since March 1997.

The average person doesn't understand the correlation between Fed cuts and what they have to pay to borrow money, said Ed Barton, vice president of Money Marketing, a Hagerstown mortgage broker.

People started calling Tuesday, thinking the announcement meant a corresponding drop in mortgage rates, Barton said.

Actually, Greenspan's indication that Fed interest rates would be cut prompted a series of incremental drops in mortgage rates in the week after he made the comments, he said.

"When the cut happened, it was a nonevent," Barton said.

Barton said the rate for a 30-year fixed mortgage rate dropped from 6 3/4 percent to 6 5/8 percent, with no points on Wednesday afternoon. But he said he couldn't say it was because of the Fed's cut on Tuesday.

Mortgage rates have been "artificially high" since the yield on 30-year Treasury bonds was lowered about three months ago, he said.

Mortgage rates have historically followed the bond yield, said Barton, who said mortgage rates hardly moved after the 3/8 of a point drop in the yield.

He's not banking on further drops in mortgage and other interest rates just because of the Fed action, he said.

"It's a good sign, but it doesn't have to happen that way," said Barton.

So many things - including what happens with the Asian, Russian and Brazilian markets - can affect domestic interest rates quickly, he said.

The Fed cut the federal funds rate - the interest banks charge one another - a quarter percentage point, from 5.5 percent to 5.25 percent.

For the economy, such a cut is like a stone thrown into a pond, said Hagerstown Trust spokesman Dave Barnhart.

Norwest's cut was the first reduction in the prime rate since February 1996. The prime rate generally moves in concert with the Fed funds rate.

When prime rates are cut, commercial loans, home equity lines of credit and mortgages are usually the first three categories affected, Barnhart said.

Home mortgage rates - already at their lowest point in a generation - will be interesting to watch, he said.

On the negative side, interest rates for savings accounts and certificates of deposit could be lowered, Barnhart said.

Hagerstown Trust Co. will look at rates nationally, regionally and within its market and make adjustments to stay competitive while serving stockholders, he said.

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