Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, May 19, 1994 TAG: 9405190142
SECTION: BUSINESS PAGE: B8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Mark Vitner, an economist for First Union Corp. in Charlotte, N.C., said the half-point jump in the prime - reaction by many U.S. banks to the Federal Reserve Bank's increase late Tuesday in two of its key lending rates - will be reflected in most consumer lending rates, from adjustable rate mortgages to auto loans. Most commercial loans are tied directly to the prime and will move rapidly.
He did not expect that to slow the economy, however, because interest rates still are relatively low compared to times before 1992, especially the 1980s.
He expects the rates for bank certificates of deposit to go up as well. Vitner said banks did not want to attract new deposits while the demand for loans was weak last year. Now, however, demand for borrowing has increased significantly, so banks again have incentive to pay more for CDs.
Vitner said the half-point jump will "absolutely not" kill this year's demand for loans. That demand, he said, was one of the reasons for the action of the Federal Reserve Board in pushing up interest rates in the first place.
Christine Chmura, an economist with Crestar Bank in Richmond, said many credit card rates are tied directly to the prime. She said the higher interest will "trickle through" in time to other borrowing rates such as auto loans.
Mortgage rates went up with the prime in the past, she said, but this time they may not. That's because mortgage rates are affected by the 10-year and 30-year Treasury bonds, not the prime, and the rate on the bonds fell after the Federal Reserve Board raised its discount rate to 3.5 percent and the federal funds rate to 4.25 percent.
The long-term Treasury bonds reflect investor beliefs about inflation, Chmura explained. Because the board acted to contain inflation, she said, the bond yields may fall by the end of the year.
Chmura believes that this week's action by the board is "the end of it for now." She believes that interest rates are at a neutral level, neither high nor low, and the board will hold rates steady for many months, perhaps to the end of the year.
Much will depend on how the economy reacts to this week's increase, Chmura said, and the action will take several months to trickle through the economy.
Vitner, on the other hand, believes the board may raise rates by a quarter-point in June or July, then hold steady.
Mary Houska, professor of economics at Hollins College, said she hopes "it's the end, I really do."
She was pleased to see long-term rates hold steady after the board acted because long-term rates affect economic growth.
No inflation appears to be in sight, Houska said, and this year is the first time the board has acted to stem inflation when none was apparent. "We have some very conservative people on the Federal Reserve Board," Houska said.
Crestar Bank, NationsBank and NBC Bank all raised their prime rates to 7.25 percent effective Tuesday. Those who changed Wednesday were Central Fidelity Bank, First Union Bank, First Virginia Bank and Signet Bank.
by CNB