Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, February 2, 1995 TAG: 9502030015
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
Analysts said the increase of short-term interest rates is likely to be a slight drag on growth in the housing and auto sectors, key elements in the economy.
The Fed's half-point increase in two key rates was followed immediately by a similar boost by major banks in their prime lending rate, from 8.5 percent to 9 percent, the highest level for the benchmark rate since early 1991. Many home equity and credit card loans are tied to the prime, as are certain business loans.
Major Virginia banks followed the national trend, raising their prime rates from 8.5 percent to 9 percent. The change was effective Wednesday at Crestar Bank, First Union Bank, First Virginia Bank, NationsBank and NBC Bank. It goes into effect today at Central Fidelity and Signet banks.
The Fed increased its discount rate, the interest the bank charges on direct loans to commercial banks, from 4.75 percent to 5.25 percent. It increased its target for the more important federal funds rate, the interest banks charge each other, by a half-point, to 6 percent.
When the central bank began this cycle of interest rate increases on Feb. 4, 1994, the funds rate was 3 percent. The latest increase means it has been doubled in just 12 months even though the underlying rate of inflation has actually declined.
``The Fed is reacting not to inflation, but to the fears of inflation,'' protested Robert Brusca, an economist at Nikko Securities in New York. The year of rate increases is enough ``that we could see a recession in 1996,'' he said.
Analysts said the rate increases, combined with the reduction of U.S. exports because of the Mexican financial crisis, will help erode growth to an annual rate nearer to 3 percent than the 4 percent pace of 1994.
Housing has held up better than many economists expected since the Fed began raising rates, helped by robust strength of the overall economy.
David Lereah, chief economist at the Mortgage Bankers Association of America, said interest rate increases ``always hurt housing,'' but that he expects only modest declines in home sales and housing construction in the first quarter.
It takes any rate increase several months - some economists say at least a year - to filter through fully into the economy. So 1995 will feel the weight of 1994's six tightening steps, as well as some initial effects from any moves this year, analysts said.
The auto sector, which performed strongly in 1994, is likely to suffer as consumers become more reluctant to buy big-ticket items, analysts said.
David Littmann, senior economist at Comerica Bank in Detroit, said the Fed's move will have a ``greater impact now'' than earlier moves, leaving its mark on consumer credit and thus on auto purchases.
Brinner also said the auto sector would weaken, especially since leasing is ``the fashionable purchasing option today'' and leasing funds tend to be very short-term money.
While a weaker economy next year would not help President Clinton's re-election chances, the White House maintained its neutrality on Fed actions.
Two major business organizations attacked the Fed move.
``The Fed's action is overkill. The economy is already beginning to slow down,'' said Jerry Jasinowski, president of the National Association of Manufacturers.
Martin Regalia, chief economist of the U.S. Chamber of Commerce, said, "The combined effect of these rate increases could kill economic growth.''
Wall Street had a mixed reaction Wednesday. The Dow Jones industrial average closed up 3.70. The bond market slumped on fears that the central bank would stop raising interest rates before it has decisively controlled inflation. The 30-year Treasury bond rose to 7.75 percent, up from 7.69 percent on Tuesday.
by CNB