Local spenders find cuts enticing

Wednesday, December 12, 2001

Whether the Federal Reserve's 11th cut in interest rates this year will help the economy remains to be seen, but local banking officials and car dealers say area consumers are doing their part.

The Federal Reserve on Tuesday pushed its target for the federal funds rate, the interest banks charge each other, down to a 40-year low of 1.75 percent. The Fed also reduced its discount rate, the interest it charges to lend money directly to banks, by a quarter-point to 1.25 percent, the lowest level on record.

Stocks gained ground after the Fed's announcement, but the Dow Jones industrials ended the day down 33.08 points. The Nasdaq Composite Index ended higher by 9.81 points.

The cuts were made in an attempt to spur spending and keep the economy from sinking further into recession. But even before Tuesday, previous rate cuts had local consumers flocking to banks and mortgage companies.

"We've been crazy with home refinances," said Angela Bartlett of Century Mortgage and Finance Corp. in Cape Girardeau. "The rates were so high for so long and suddenly they just dropped. People can't resist it."

When people refinance homes or cars, payments decrease, giving them more money to spend, said Lowell Peterson, president of Firstar Bank in Cape Girardeau.

"If they lower their payment from $550 to $475, that's another $75 going into the local economy," he said.

The economy has been in recession since March and was dealt a severe blow by the Sept. 11 terrorist attacks. Since then, consumer confidence has plunged, layoffs have skyrocketed and unemployment has soared, hitting 5.7 percent in November.

Should spur spending

Economists hope that lowering borrowing costs will persuade consumers and businesses to spend and invest. Southeast Missouri State University professor of economics Bruce Domazlicky said that should be the case.

"Lower interest rates in general encourage people to buy homes and cars or businesses to buy capital goods," he said. "The basic idea is that lower rates encourage borrowing, and that leads to more spending."

While it has been a year of constantly falling rates with no positive effect yet, Domazlicky said he believes the phrase "Don't bet against the Fed."

"It usually takes six to 12 months for something to happen," he said. "People usually need time to make a decision. They don't see that the rates are lowered and go out and buy something."

By midyear next year, things shouldn't look as bleak as they do today, Domazlicky said.

But he cautioned there are two sides to the equation. The other is that those with money in interest-bearing savings accounts aren't making as much, which tends to hurt older people more.

"So that offsets it some, but it shouldn't be so great as to negate the effect the Fed is looking for," he said.

Nationwide, retail sales surged 7.1 percent in October, pushed higher by a 26.4 percent jump in auto sales.

Bob Neff, owner of Ford Groves, said lower interest rates helped "blow the doors off" in October in November. "For those who remember when the prime rate was 18 percent in the early '80s, this looks great," he said.

Neff said lower rates also mean more loan payments go to principal and less to interest. That means people are building more equity in their cars faster, he said.

Rex Probus, general manager of Auffenberg Chrysler Supercenter, said October was the best retail month they have had since 1993.

"People were buying new cars across the board, from economy cars to high-dollar luxury cars," he said.

Reduction reaction

In response to the rate reductions, commercial banks were expected to reduce their prime lending rates, the benchmark for millions of consumer and business loans, by a similar quarter-point to 4.75 percent, the lowest since November 1965.

Tuesday's quarter-point cut in the federal funds rate marked the fourth reduction since the terror attacks, but the three previous cuts were each by a bigger half-point. The last rate cut came Nov. 6.

Financial markets had expected the smaller quarter-point cut, believing the central bank would make the switch in an effort to signal that the string of rate cuts may be drawing to a close. But policy-makers left the door open to further rate cuts should the recession show signs of lingering.

The Fed's credit easing, which started Jan. 3, has reduced the federal funds rate by 4.75 percentage points in the past year. That is the most aggressive string of rate reductions in a 12-month period since 1981, when the central bank tried to pull the country out of the worst recession since the Great Depression. The Fed's actions this year were not enough to prevent the nation from falling into its first recession in a decade.

One of the reasons the Fed has had room to cut rates so aggressively is because inflation has remained under control.

The Associated Press contributed to this report.


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