THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Friday, July 7, 1995 TAG: 9507070339
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Medium: 70 lines
The Federal Reserve's reduction of a key interest rate by a quarter-point Thursday could prompt hesitant consumers to step up their spending and borrowing, economists and bankers say.
``It's certainly good news for the local economy,'' said John W. Whaley, chief economist with the Hampton Roads Planning District Commission. ``I would expect auto sales to perk up a little bit.''
Fears of recession fueled by weak economic indicators are believed to have prompted the Fed's rate cut. Nationwide, home sales, car sales and employment - benchmarks of economic health - have declined or been stagnant in recent months.
In Hampton Roads, job growth has been robust, but consumers have restrained their spending on big-ticket items like autos, Whaley said.
The Fed's Open Market Committee's decision to cut the federal-funds rates a quarter-point, from 6.0 percent to 5.75 percent, could restore consumer confidence by signaling that a recession isn't likely and by reducing the cost of borrowing.
The federal-funds rate is what banks charge on money they lend each other overnight. The cuts can mean lower rates on consumer loans.
The Fed kept its discount rate - the rate it charges banks for Fed loans - at 5.25 percent.
Economists and bankers are already assessing the likelihood of another rate cut when the Fed's Open Market Committee meets again in late August. That's partly because Fed Chairman Alan Greenspan has said in public statements that inflation has moderated.
``If price pressures keep receding, the Fed could cut rates another quarter-point,'' said G. David Orr, senior vice president and chief economist at Charlotte-based First Union Corp. ``By then, there will be two job reports out. If both are negative, the Fed could cut rates a half-point.''
Central Fidelity Banks Inc. has seen a slackening in demand for certain types of consumer loans, said Charles W. Tysinger, chief financial officer of the Richmond-based banking company. In Northern Virginia in particular, ``we've seen some hesitation in what used to be a dynamic part of the state's economy,'' he said.
The Fed's reduction in short-term rates Thursday could change that, he said. ``Any easing of interest rates should be beneficial for banks and consumers.''
A handful of banking companies around the country, including Banc One Corp. of Columbus, Ohio, responded immediately by announcing a cut in its prime lending rate to 8.75 percent from 9 percent, effective today.
Banks elsewhere are likely to do the same within a few days, said First Union's Orr.
Home-loan rates have been declining in reaction to low rates of inflation and slowing demand for mortgage loans.
``At the beginning of the year, mortgage rates were 9.20 percent. They've fallen to less than 8 percent,'' said Christine Chmura, an economist with Crestar Bank in Richmond. ``We should see some further decline.''
However, a drop in the rates for long-term, fixed-rate mortgages will not generate a surge in loan demand, she said. ``We are four years into this recovery, and the pent-up demand (for home loans) isn't out there.''
Vicki Stephenson, a mortgage officer at NationsBanc Mortgage in Virginia Beach and president of the Tidewater Mortgage Bankers Association, said the Fed's announcement had prompted prospective borrowers to inquire about home-loan rates Thursday afternoon.
``When you have talk about interest rates coming down, you have phone calls from people asking, `How does this affect what I want to do?' '' by CNB