Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: FRIDAY, March 25, 1994                   TAG: 9403250149
SECTION: BUSINESS                    PAGE: B5   EDITION: METRO 
SOURCE: associated press
DATELINE: NEW YORK                                 LENGTH: Medium

ARE THE AVERAGE JOE AND JANE LIKELY TO BE WINNERS OR LOSERS?

The Fed pushed rates upward Tuesday and banks followed the lead late Wednesday and Thursday, raising their prime lending rates. For the Fed, it's a crusade to keep the economy and inflation from growing too fast. But the fallout could affect everyone from home buyers to savers to consumers using credit cards.

Here are some questions and answers about how the Fed's move may affect consumers:

How do higher rates prevent the economy and inflation from growing too fast?

Higher interest rates usually discourage people from taking out as many loans. That, in turn, slows spending, economic growth and price increases.

Will the Fed's actions drive up interest rates on consumer loans?

Yes. As banks anticipate paying more for funds they borrow, they charge consumers more to take out loans.

Some rates, including those on some credit cards, rose even before the Fed's decision. Other rates will rise because major banks decided to increase their prime lending rates from 6 to 6.25 percent. The prime is used as a base rate to figure the interest charged on many home-equity loans and some credit cards.

Are all consumer loan rates destined to rise soon?

Not necessarily. Rates for new car loans, for example, have actually dropped slightly since the start of February, according to the Bank Rate Monitor National Index, compiled from rates charged by large banks and thrifts in 10 metropolitan areas.

Bob Heady, publisher of the North Palm Beach, Fla.-based Bank Rate Monitor newsletter, which computes the index, said banks weren't raising those rates, because they wanted to make more short-term car loans.

However, if interest rates continue to rise, all consumer loans eventually would be affected.

What effect have the Fed's actions had on mortgage rates?

Fixed mortgage rates usually are based on yields for 30-year or 10-year U.S. Treasury securities, which fluctuate according to what investors do in the bond market.

Inflation is anathema to bondholders, because it decimates the value of the fixed interest payments they receive. So they'd be expected to praise the Fed's move, pushing bond prices higher and, in turn, market yields lower.

But contrary to some expectations, investors reacted negatively to the Fed's first tightening of rates in February. Instead of seeing the Fed as a good anti-inflation cop, nervous investors guessed the Fed had glimpsed inflation on the horizon.

Economists say the jump in mortgage rates following the Fed's first tightening was an overreaction. Rates could drop further. However, with the economy growing and short-term interest rates apparently heading upward, it's unlikely they'll fall much.

What about people with adjustable-rate mortgages?

Those mortgages follow the movement in short-term U.S. Treasury bills. With yields on those bills rising, consumers can expect to see their rates adjusted upward.

Are there any positive effects for consumers?

Rates on many certificates of deposit and money-market accounts are rising. That's because with interest rates on bond investments up, banks have to pay more to attract depositors' money.