Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, July 7, 1995 TAG: 9507070067
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: MIKE STREETO BLOOMBERG BUSINESS NEWS
DATELINE: NEW YORK LENGTH: Medium
The Federal Reserve, worried about growing signs of recession, announced it was cutting its target for the federal funds rate from 6 percent to 5.75 percent. This is the rate banks charge each other for overnight loans.
The decision was announced after a two-day meeting of the Federal Open Market Committee, the group of Fed governors and regional bank presidents that sets interest rate policy.
In a brief statement explaining the decision, Chairman Alan Greenspan said, ``As a result of the monetary tightening initiated in early 1994, inflationary pressures have receded enough to accommodate a modest adjustment in monetary conditions.''
The stock and bond markets gave an immediate, enthusiastic endorsement. The Dow Jones industrial average jumped 48.77 to close at a record 4,664. Strong demand for bonds pushed the yield on Treasury's 30-year bond down to 6.49 percent, compared to a previous close of 6.60 percent.
Most private economists generally praised the reduction in the funds rate, the first cut since Sept. 4, 1992. Many predicted it would be followed by a string of further rate cuts if economic activity remains soft.
``The Fed did the right thing,'' said Robert Dederick, economic consultant at Northern Trust Co. in Chicago. ``This doesn't guarantee that there won't be a recession, but it certainly improves the odds that we can avoid one.''
``This was good economics - and good politics,'' said David Wyss, an economist at DRI-McGraw Hill, an economic consulting firm based in Lexington, Mass.
``President Clinton's main political requirement for next year's presidential election is that the economy do well next year,'' Wyss added, ``and Alan Greenspan's job security depends on satisfying that desire. In my estimation, Greenspan couldn't afford to wait much longer.''
Greenspan's term ends in March; it's up to Clinton whether Greenspan gets reappointed to a third, four-year term.
The Fed's move and the drop in bond yields give all those consumers who missed the rock-bottom mortgage rates of 1993 a second chance to refinance or buy a home, say lenders.
``We have a market that's a good deal'' for homebuyers, said Pat Casey, a senior vice president at Crestar Mortgage in Washington, D.C. ``Who ever dreamed you'd get a second chance?''
Homebuyers won't have to wait long before they see lower bond yields translated into lower mortgage rates.
The effects will be felt almost immediately, because many lenders reset their rates daily, based on changes in the price of mortgage-backed securities and Treasuries, said Terry Hodel, president of North American Mortgage Co. in Santa Rosa, Calif.
Homebuyers can get an idea of where mortgage rates are headed by checking the yield of the 10-year Treasury note, a benchmark for mortgage rates.
The yield of the 10-year Treasury fell to 6.03 percent from 6.18 percent Thursday.
Thirty-year mortgage rates averaged 7.63 this week, down from 7.85 percent a month ago and 9.25 percent in mid-December, according to the Federal Home Loan Mortgage Corp.
The drop comes just in time for the traditional summer homebuying season, when a combination of good weather and vacations prompt consumers to shop for a mortgage. Another bit of good news for buyers is that U.S. homes don't cost much more than they did last year.
Prices were up just 2.6 percent in the year ended March 31. That rise didn't even keep pace with consumer prices, which rose 2.9 percent in the same period.
The Fed's decision to lower rates also may pave the way to even lower mortgage rates in the next few months, say some lenders.
``Usually when the Fed starts lowering or raising rates, they do it in steps,'' Hodel said. ``This is a step in the right direction.''
The best news may be for those planning to buy a home, since many Americans already are holding low-rate loans they took out in 1993, say lenders.
``This move won't do much for people who want to refinance,'' said Barry Habib, president of Certified Mortgage Associates in Marlborough, N.J. However, ``for people who want to buy, we have a good market.''
The Associated Press and Hearst Newspapers contributed information to this story.
by CNB