DATE: Wednesday, March 26, 1997             TAG: 9703260432

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY TOM SHEAN, STAFF WRITER 

                                            LENGTH:   87 lines

FED NUDGES UP INTEREST RATES LOAN DEMAND IN VIRGINIA UNLIKELY TO BE AFFECTED.

The Federal Reserve's decision to raise short-term interest rates will do little to dampen loan demand among Virginia consumers and businesses, bankers and economists predicted Tuesday.

``I would expect a fairly minimal impact,'' said Richard F. Bowman, chief financial officer of First Virginia Banks Inc. in Falls Church. ``Most of what the Fed is doing now is psychological.''

Citing concerns about the robust pace of economic expansion, the Fed's Open Market Committee raised the banks' borrowing costs to 5.5 percent from 5.25 percent.

It was the first increase in the so-called Fed funds rate in more than two years. This rate is what banks charge when lending each other their excess funds overnight.

A handful of major banks, including New York-based Citicorp and Norwest Corp. in Minneapolis, responded by announcing quarter-point increases in their prime lending rates to 8.5 percent. Their increases take effect today. Other banks are likely to do the same.

The prime is the base rate that banks use when setting rates for their business borrowers. It's also the benchmark for some consumer loans, including home-equity lines of credit and certain credit-card accounts.

Because of public remarks by Fed chairman Alan Greenspan, the Fed's action had been widely anticipated. In fact, short-term interest rates moved higher early Tuesday in anticipation of the Fed's increase.

Two widely used measures of inflation, the U.S. Consumer Price Index and the Producer Price Index, have remained subdued for several months. But during his decade-long tenure as chairman of the central bank, Greenspan has demonstrated his determination to prevent any inflationary pressure from building within the national economy.

The Fed explained its decision in a prepared statement: ``This action was taken in light of persisting strength in demand, which is progressively increasing the risk of inflationary imbalances developing in the economy.''

By itself, a quarter-point rise in short-term rates will cause very few consumers or businesses to cancel their borrowing plans, bankers said. However, additional rate increases could significantly slow their demand for credit. That, in turn, would throttle back the nation's economic expansion.

``If we were to get a series of quarter-point increases close together, this could have an effect,'' said Charles Tysinger, chief financial officer of Richmond-based Central Fidelity National Bank.

In 1994, the Fed imposed a painful series of rate increases that sharply curbed the country's appetite for credit. That's less likely to happen this time, said Christine Chmura, senior economist with Crestar Bank in Richmond.

Three years ago, ``there was a lot of pent-up demand among consumers,'' Chmura said. ``We also had very low interest rates. The federal funds rate then was 3 percent, compared with 5.25 percent'' before Tuesday's rate change.

The Fed's action will have no direct impact on the cost of long-term, fixed-rate home mortgages. The rates for most of these are pegged to 10-year Treasury securities.

The rates for long-term home loans could rise, but any change probably won't match the quarter-point increase in the federal funds rate, Chmura said.

However, the Fed's move will force up rates for adjustable-rate home loans because they are pegged to shorter-term Treasury securities. That, in turn, could squeeze some prospective home buyers out of the housing market, said David Orr, an economist with the Charlotte-based banking company First Union Corp.

Until now, the low rates of adjustable-rate mortgages have enabled consumers who didn't qualify for longer-term loans to get home mortgages, he said.

The rates for auto loans also could rise. However, competitive conditions probably will force banks in Virginia to hold down their rates, bankers said. The pace of auto sales this spring has not been robust, said First Virginia's Bowman. In addition, the auto manufacturers' finance subsidiaries have been offering low-interest loans to sell new cars.

``There's a lot of pressure to keep these rates low,'' Bowman said.

As in the past, it will take several months for the full impact of higher rates to register in the national economy.

But evidence of slower growth in loan demand, jobs and retail sales could materialize by May 20 when the Fed's Open Market Committee meets again to examine interest rates, said Orr of First Union.

``My belief is that by the time we get into the data for April, we're going to see a deceleration'' in these numbers, he said. ILLUSTRATION: RECENT HISTORY OF FEDERAL FUNDS RATE

CHART

ROBERT D. VOROS

The Virginian-Pilot

SOURCES: Bridge Financial News: Knight-Ridder Tribune

[For a copy of the chart, see microfilm for this date.] KEYWORDS: INTEREST RATES

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