Fed interest cut offers some relief

By Don Shilling

Savings rates are expected to stay up as some loan rates fall.

The owner of Sleepy Hollow Sleep Shops found himself resting more comfortably after the Federal Reserve cut interest rates.

“We’re going to see an immediate effect. That’s terrific,” Bruce Berry said Wednesday.

He has adjustable rates on loans used to build his five stores, and they will be coming down as banks reduce their prime rates after the Fed cut a key interest rate Wednesday.

Lower rates mean lower loan payments for Berry’s business.

“It frees up cash flow. That always helps,” he said.

The aid is especially helpful as a sagging economy has reduced sales a bit, he said.

“We’re doing all right, but we could be doing a lot better,” he said.

Not every borrower, however, will be helped by the Fed’s action, bankers said.

Mortgage rates, for example, won’t come down immediately, said Steve Lewis, president of First Place Bank.

Adjustable-rate mortgages normally are tied to one-year Treasury notes, while fixed-rate mortgages move with 10-year Treasury notes, he said.

Neither is directly tied to the federal funds rate, which the Fed cut from 2 percent to 1.5 percent. This is the amount that banks can charge each other for overnight loans.

The downward pressure on interest rates, however, makes it possible that mortgage rates will fall over time, said Frank Paden, president of Farmers National Bank in Canfield.

Existing car loans are typically fixed-rate loans so they won’t be affected by a drop in interest rates, but rates on new loans could fall eventually, Paden said. His bank generally sets new rates for car loans once a month.

The Fed’s move will have the most immediate impact on business and homeowner loans that are tied to the prime rate, the bankers said. Some banks reduced their prime rate from 5 percent to 4.5 percent after the Fed’s move.

Lewis said home-equity loans normally are adjusted for prime once a month. Businesses, however, can have their rates adjusted more often, as much as every day.

Normally, good news for borrowers means bad news for savers as interest rates come down on both loans and savings accounts.

Bob New, president of First National Bank in Hermitage, Pa., said, however, that savings rates are already so low that he doesn’t think they will come down that much.

Lewis said the competition is too strong to cut rates for money market accounts and certificates of deposits, although Paden said he thinks rates on four- or five-year CDs could fall.

Some financial institutions are out to build their deposit base, so they are keeping rates high for savings vehicles, Paden and Lewis said.

The bankers said they doubted the Fed’s cut would have much of an effect on the economy. New said he thinks the economy already is in a recession but it hasn’t been officially declared.

Rescuing the economy will take more than lower interest rates because those rates already are low, he said. The bigger problem is that businesses are at risk of not getting loans because of the nation’s credit crisis, he said. Congress passed a $700 billion plan to buy bad debts from investment banks in the hopes of loosening credit in the system.

The local bankers, however, said they have money to lend to qualified buyers.

Consumers, however, are being cautious because of the large drops in stock market values recently and the collapse of Wall Street investment banks.

“Everybody is taking a wait-and-see approach,” Paden said.

shilling@vindy.com