THE VIRGINIAN-PILOT 
              Copyright (c) 1996, Landmark Communications, Inc.

DATE: Thursday, February 1, 1996             TAG: 9602010278
SECTION: BUSINESS                 PAGE: D1   EDITION: FINAL 
SOURCE: STAFF AND WIRE REPORT 
                                             LENGTH: Medium:   62 lines

FED REDUCES TWO INTEREST RATES AS BANKS FOLLOW BY LOWERING PRIME RATE, BORROWING COSTS EXPECTED TO FALL.

The Federal Reserve cut a key interest rate Wednesday, the second such move in two months, amid persistent signs of a weakening economy. The move was expected to translate quickly into lower borrowing costs for millions of Americans.

In an announcement at the end of a two-day closed meeting, the central bank's Federal Open Market Committee said it was cutting the federal funds rate, the interest that banks charge on overnight loans, from 5.5 percent to 5.25 percent. The latest rate cut followed similar quarter-point reductions in December and last July.

The central bank also said it was cutting the discount rate from 5.25 percent to 5 percent. The discount rate is what the Fed charges for direct loans to banks and is basically symbolic.

A cut in the funds rate normally triggers an almost immediate reduction in commercial banks' prime lending rate, the benchmark rate for many business and consumer loans such as home equity loans.

Large national banks including Chase Manhattan Corp., Banc One Corp. and NationsBank Corp. followed the Fed's action promptly, cutting their prime rates to 8.25 percent from 8.5 percent. Many consumer and business loans are tied to the prime rate, the interest rate banks charge to their best customers for loans.

Falls Church-based First Virginia Banks Inc. announced Wednesday that it will cut its prime lending rate to 8.25 percent today. Other regional and local banks were slower to react, but are expected tocut their prime rates soon.

``This is exactly what we need to perk up the local economy,'' said John Whaley, economist for the Hampton Roads Planning District Commission.

But Whaley worried that consumers may not take advantage of the rate cuts because their confidence in the economy is flagging and they're already carrying too much debt.

In explaining its action, the Fed said, ``Moderating economic expansion in recent months has reduced potential inflationary pressures going forward. With price and cost trends already subdued, a slight easing of monetary policy is consistent with contained inflation and sustainable growth.''

Wednesday's move followed various reports of a slowing economy, including anemic consumer spending, sluggish manufacturing and a flat housing market. Analysts said the central bank is clearly more worried about the slowing economy than inflation.

Bruce Steinberg, an economist at Merrill Lynch in New York, called the energy price surge a temporary setback that he blamed on the cold weather and a spike in crude oil prices. He noted that energy prices already had fallen in January.

``The bigger story is that basically there is no wholesale inflation,'' he said. ILLUSTRATION: Graphic

Knight-Ridder News Service

WHAT TO EXPECT

[For complete graphic, please see microfilm]

by CNB