THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Wednesday, November 16, 1994 TAG: 9411160452
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Medium: 63 lines
The Federal Reserve Board has done it again, and this time it's going to cost you.
An interest rate increase of three-quarters of a percentage point, imposed Tuesday by the Fed, will bump up borrowing costs on everything from new-car financing to adjustable-rate mortgages and credit cards.
If you're shopping for a 15- or 30-year fixed-rate mortgage you shouldn't notice a thing, at least not right away. It's still too early to tell what the Fed's move will do to long-term loans or by how much it will slow down economic expansion.
The good news: The interest that banks pay on savings accounts or certificates of deposit is likely to increase.
Among the first to feel the impact of the Fed's sixth rate increase this year will be businesses. Most banks will react to the three-quarter-point increase in their cost of money by boosting their prime lending rates to preferred business customers, to 8 3/4 percent. The benchmark rate for most business loans had been 7 3/4 percent before Tuesday and as low as 6 percent in January.
Just how badly the rates will slow the economy is still open to speculation. Some economists argue that the increase will cut inflation just enough. Others say the move is overkill, especially in regions with already sluggish economies, like Hampton Roads.
Some major banks in the region, including NationsBank, Central Fidelity and First Virginia, quickly increased their prime lending rates late Tuesday, and others said they were likely to do so today.
In addition to serving as the basis for most commercial loans, the prime rate is the benchmark for several types of consumer loans, including credit-card borrowing and home-equity lines of credit.
But rising rates probably will not discourage individuals from taking on debt for cars, home improvements or credit-card purchases, predicted G. David Orr, chief economist with bank holding company First Union Corp. in Charlotte.
Tuesday's increase in short-term interest rates will add about $9 to the monthly payment on an average new-car loan, he said.
And with the aggressive marketing by credit-card issuers, the Fed's increase won't be passed on fully to card users, Orr said.
However, the use of adjustable-rate mortgages could fall off because many of these loans are pegged to the rate on one-year Treasury bills.
``That may push some home buyers out of the market,'' said Christine Chmura, an economist with Crestar Bank in Richmond. by CNB