Originally created 03/20/01

Fed cut prospect welcomed



Whether the Fed cuts the prime lending rate by a half or three-fourths of a point today remains to be seen, but a cut of some sort is expected and local businesspeople say the action can only help the near pancake-flat national economy.

Federal Reserve Chairman Alan Greenspan is expected to announce the interest rate cut for borrowers today at a regularly scheduled afternoon meeting. The strategy of prime rate slashing, already implemented in two half-point increments in January, is as a short-term stimulus - leaving more money in the business community's pockets for other spending and investment.

The Fed-directed prime rate is the standard for which commercial banks make loans to borrowers with the highest credit ratings.

A falling Dow Jones Industrial Average last week was the latest example of sputtering economic activity - not just in the hard-suffering manufacturing sector but in the economy as a whole. The Dow dropped 207.87 points Friday to close at 9,823.41 - a slide of 821.21 points for the five-day period.

The Dow, buoyed by talk of a rate cut, ended Monday up 1.4 percent at 9,959.11.

"Historically, interest rate cuts by the Fed have been good news," said Wayne Barron, investment representative with Edward Jones Investments in south Aiken. "If we look at interest rate cuts for the past 85 years, the stock market has on average been 20 percent higher one year after the initial rate cut and 28 percent after a second rate cut."

Dan Blanton, the president of Georgia Bank & Trust Co., said the rate cut should serve as a quick kick start nationally and locally.

"It's a good thing for customers and business in general," Mr. Blanton said. "It's good for the mortgage business and the construction business because it gives them more buying power."

Long-term benefits for individuals might not be as obvious.

Mortgage rates, for example, are expected to hold at slightly less than 7 percent for 30-year mortgages, Mr. Blanton said.

Some analysts, though, are predicting eventual savings on mortgages, and on credit card debt and car loans.

But individuals might benefit more quickly from the new jobs and new commerce created.

Mr. Blanton said a cut in the prime rate combined with a proposed federal tax cut could be the powerful one-two punch that would knock out any lingering recessionary fears.

Proponents of the rate cut say the value of the dollar has held strong, making worries of complications from inflation irrelevant. The Labor Department's most recent Producer Price Index listing, which measures inflationary pressures before they reach store shelves, crept up only .1 percent in February - despite higher prices for natural gas and other energy products.

The symbolism of today being the first day of spring couldn't hurt Mr. Greenspan's announcement. New housing starts, one tangible indicator of economic well-being, typically rise as warmer weather arrives. The Fed's move hopes to lift seasonal construction activity one step further.

Mark Herbert, the owner of the Augusta construction company Herbert Homes Inc., said area housing activity has been stable and needs a catalyst to expand. He said a rate cut is a good start, but more significant change will have to take place in terms of the area's employment picture.

"Augusta is hurting for a new job base to increase the higher paying jobs in the area, and that will in turn create a little better housing market," Mr. Herbert said.

Regardless, he said, 2002 is forecast to be a stronger year because of the cyclical nature of the housing market and the economy as a whole.

Rate cuts

Investors are hoping the Federal Reserve will cut interest rates by at least 0.75 percentage points when it meets today. Such a cut would be the biggest since 1991. Here is a look at recent interest rate increases and decreases:

Jan. 31: 5.5 percent, -0.50

Jan. 3: 6 percent, -0.50

May 16, 2000: 6.5 percent, +0.50

March 21, 2000: 6 percent, +0.25

Feb. 2, 2000: 5.75 percent, +0.25

Nov. 16, 1999: 5.5 percent, +0.25

Aug. 24, 1999: 5.25 percent, +0.25

June 30, 1999: 5 percent, +0.25

Nov. 17, 1998: 4.75 percent, -0.25

Oct. 15, 1998: 5 percent, -0.25

Sept. 29, 1998: 5.25 percent, -0.25

March 25, 1997: 5.5 percent, +0.25

Jan. 31, 1996: 5.25 percent, -0.25

Dec. 19, 1995: 5.5 percent, -0.25

July 6, 1995: 5.75 percent, -0.25

Feb. 1, 1995: 6 percent, +0.50

Nov. 15, 1994: 5.5 percent, +0.75

Aug. 16, 1994: 4.75 percent, +0.50

May 17, 1994: 4.25 percent, +0.50

April 18, 1994: 3.75 percent, +0.25

Associated Press reports were used in this article.

Reach Eric Williamson at (706) 828-3904.