Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, April 19, 1994 TAG: 9404190178
SECTION: BUSINESS PAGE: C-10 EDITION: METRO
SOURCE: Knight-Ridder/Tribune
DATELINE: WASHINGTON LENGTH: Long
``For Joe Sixpack, the message is, `Your rates are going up, and this isn't the last one,''' said James Annable, chief economist for First National Bank of Chicago.
The Fed pushed the federal funds rate - the fee banks charge each other for overnight loans - to 3.75 percent Monday; it was the third quarter-point rate increase the central bank has engineered since Feb. 4 in an effort to head off inflation.
Stock and bond markets plunged in reaction - just as they did following identical Fed rate increases Feb. 4 and March 22.
``This is going to definitely move mortgage rates,'' said David Lereah, chief economist for the Mortgage Bankers Association. He said 30-year mortgages should reach 8.5 percent in a day or two and should keep rising slowly throughout this year.
Most consumer and business bank-loan rates were not affected immediately by Monday's action; the main impact was felt on loans whose rates ``float'' with daily market swings, such as adjustable-rate mortgages, home-equity loans and variable-rate credit cards.
But one major bank - Banc One Corp. of Columbus, Ohio, and its Texas affiliate - used the Fed's action Monday as a springboard to raise its prime lending rate half a percentage point to 6.75 percent.
Citibank and Chemical Bank, both of New York, and Banc One Corp. of Columbus, Ohio, led the move to a higher prime rate, saying they were boosting this benchmark for many business and consumer loans by a half-percentage point to 6.75 percent. No Virginia banks announced changes in their prime rates Monday, but they generally follow trends set by money center banks.
Loan rates for a wide range of purposes from car purchases to business expansion are tied to bank prime rates. Most banks had raised their prime rates a quarter point, to 6.25 percent after the Fed's March 22 increase; they are likely to raise them again soon, analysts said.
``Obviously, the industry will move; it's just a question of when,'' said David Littmann, senior economist at Commercial Bank of Detroit.
The Fed is pushing up interest rates to slow the pace of economic growth in hope of keeping a lid on inflation. The economy grew at a torrid 7 percent annual rate in the final three months of 1993, and all signs indicate continued robust activity. Financial markets worry that means an inflationary price spiral can't be far behind.
So far, however, inflation is not accelerating much. Consumer prices edged up only 0.3 percent in both February and March. Strip out volatile fuel and food prices, and so-called ``core'' consumer prices increased at only a 2.9 percent annual rate during the first quarter of 1994 - the same rate since March 1993.
Nevertheless, it has become an article of faith both at the Fed and among most economists that if the central bank waits until inflation is heating up before attacking, it's too late.
Fear that strong economic growth surely means inflation will accelerate soon has driven financial markets to raise long-term interest rates - such as for 30-year mortgages - by almost 1.5 percentage points since late January.
The Fed is attacking those market expectations of inflation as much as inflation itself, but without much success so far.
\ THE LOCAL REACTION
Vittorio Bonomo, associate professor of finance, insurance and business law at Virginia Tech: "I just feel it's inappropriate. The economy is not that strong. I don't know why, when the economy is just beginning to recover and people are starting to go back to work, they put on the brakes."
Charles Meiburg, professor of business administration, Darden Graduate School of Business Administration, University of Virginia: "The situation is increasingly driven by demand. The board raised rates because it's not willing to feed enough money into the system to keep the rates down."
Tyler Pugh, senior vice president and Roanoke branch manager for Wheat First Butcher Singer: "That's the third move in a row in the same direction. We do not take the view that this is a bad trend in the long term. Short term, it creates more volatility and turmoil on the equity and bond markets."
Mark Vittner, economist with First Union Corp.: "I was surprised to see they did it today ... They need to raise the rate by a half-point. I see another quarter-point increase in another six weeks."
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