Consumers Should Gain From Rate Cut

NEW YORK (AP) â€” The Federal Reserve's dramatic announcement lowering interest rates a half percentage point won widespread applause as a sign the nation's chief monetary policy makers won't

Thursday, January 4th 2001, 12:00 am

By: News On 6

NEW YORK (AP) â€” The Federal Reserve's dramatic announcement lowering interest rates a half percentage point won widespread applause as a sign the nation's chief monetary policy makers won't let the U.S. economy founder.

``It puts an exclamation point on the Fed's commitment to engineer a 'soft landing,''' said Jim Weiss, chief investment officer for equities at State Street Research in Boston. ``They made it very clear they are on the case and won't allow the economy to slip into recession.''

Those lower interest rates will make it easier for consumers and businesses to borrow, if they need to. Consumer spending and capital investment have been the engines of the nation's economic expansion, currently in its 119th month and the longest in U.S. history.

Investors also will benefit, at least in the short run, as was evident Wednesday, when stock markets ran up exuberant gains after the Fed's unexpected action. Mortgage rates may come down some more, giving a boost to would-be homebuyers â€” and the construction industry.

Savers, on the other hand, might consider buying certificates of deposit and other short-term accounts sooner rather than later because rates are likely to fall, experts say.

The Fed cut its target for the federal funds rate, which is the interest banks charge each other on overnight loans, to 6 percent from 6.5 percent. That had been a nine-year high.

It also cut its discount rate, the interest the Fed charges banks for loans, by a quarter point to 5.75 percent. The Fed said it was prepared to cut the discount rate by another quarter point at the request of Federal Reserve banks.

Commercial banks quickly responded by announcing a half a percentage point reduction in their prime rate, which is the interest charged their most creditworthy commercial customers.

Southwest Bank of St. Louis led the cut to 9 percent, followed by J.P. Morgan Chase, Wells Fargo and Dollar Bank. Other banks were expected to follow with prime rate cuts Thursday morning.

The Fed said the fast-slowing economy prompted the rate cuts.

``These actions were taken in light of further weakening of sales and production and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power,'' the Fed said in a statement.

Perhaps the strongest signal went to the stock markets, which ended 2000 in the doldrums and began 2001 in the same state.

Joel L. Naroff, an economist who runs a private consulting firm in Holland, Pa., put it another way. Just as Fed Chairman Alan Greenspan warned about ``irrational exuberance'' when the market appeared to be overheating, Naroff explained, Wednesday's surprise rate cut ``in essence said that 'irrational despondence' is just as bad.''

After the Fed's announcement, the Dow rose strongly, ending the day at 10,945.75, up 2.8 percent.

The Nasdaq, which lost 7 percent of its value on Tuesday, jumped 324.83, or 14.2 percent, to end at 2,616.69. The surge gave the Nasdaq its biggest one-day point and percentage gains ever.

Wednesday's session also was a record-setter in terms of volume, with U.S. stock markets registering their first day ever with a combined volume of more than 5 billion shares.

But Weiss, the State Street investment officer, warned that the market still could face some rocky sessions.

``There's already been damage to the economy and to growth in corporate profits,'' he said. ``There will be volatility as the market grapples with earnings. That's still a very important driver.''

Gary R. Thayer, chief economist at A.G. Edwards & Sons in St. Louis, Mo., expects further Fed rate cuts in the spring â€” moves he believes will be necessary to spur the economy from middling growth of about 2 percent in the first half of the year to a more-respectable 3 percent to 3.5 percent in the second half.

Wednesday's rate cuts were widely welcomed by industry.

Jerry Jasinowski, president of the National Association of Manufacturers in Washington, said the Fed's action was ``just the right medicine'' to keep the economy going. He described manufacturing as ``on the verge of recession'' as capital spending dried up, borrowing became difficult and energy costs rose.

Rick Bechtel, a manager for Wells Fargo Home Mortgage Inc. in Chicago, noted that mortgage interest rates already had begun to drop in anticipation of Fed rate cuts later this year and could fall further.

``A lower rate benefits first-time homebuyers because its easier for them to qualify, and they can get more house for their money,'' Bechtel said. ``For existing home buyers, it's a chance to move into a bigger house at the same monthly payment.''

While consumers likely will see lower interest charges on credit card debts and auto loans, they'll also see lower rates on savings instruments, said Greg McBride, financial analyst at Bankrate.com.

``The strategy now should be to lock in as high a rate as you can for as long as you can,'' McBride advised. He said that one-year certificates of deposit currently were paying 5.33 annual yields, down from a peak of 5.67 percent last September.