Wednesday, November 17, 1999

Rate increase should
be last for months

Isle banks raise their prime
lending rate 1/4 point in
response to the Fed move

From staff and wire reports


WASHINGTON -- After bumping up interest rates for the third time this year, the Federal Reserve signaled that it may remain on the sidelines for the next few months, waiting to see whether it has done enough to slow the red-hot economy to a more sustainable pace.

Many private economists believe Fed policy-makers will be content to leave rates unchanged when they meet again in December, citing the year 2000 computer changeover as one of the reasons.

"I think this is it for the year," said Lynn Reaser, economist with Bank of America Private Bank. "The Federal Reserve will be on hold for some time, allowing the economy time to respond to its previous rate increases."

The Fed yesterday nudged up by a quarter point its key short-term federal funds rate, the interest that banks charge each other on overnight loans. The rate now stands at 5.5 percent. At the same time, the Fed increased its largely symbolic symbolic discount rate, the interest it charges to make direct loans to banks, by a quarter point to 5 percent.

The central bank's move prompted commercial banks to boost their prime lending rate, the benchmark for millions of business and consumer loans. That pushed up borrowing costs for millions of Americans on variable-rate home mortgages, auto loans, credit card debt and the like.

Hawaii's major banks followed their mainland counterparts today, raising their prime lending rate to 8.5 percent from 8.25 percent. The prime rate is the interest charged the banks' best commercial customers for short-term loans, but it is also the base for a wide range of business loans, which carry interest rates set at one or two or more points above prime. Still, economists and other experts in Hawaii said yesterday that the higher rates shouldn't curb the momentum that the state's long-suffering economy has been experiencing lately.

Economist Michael Sklarz, chief of research at real estate firm Prudential Locations Inc., said the Fed's action won't immediately affect long-term mortgage rates or imperil the rebound in Hawaii home sales.

Peter Freeman, president and chief executive of the Honolulu Board of Realtors, agreed. "The pricing of homes is so favorable that a small change in the interest rate is not going to have very much of an impact," he said.

What's more, some economists believe the Fed will stay on hold until February; others said March. The answer lies in what new economic data tells central bankers about the pace of economic growth, which has been brisk, and the prospects for inflation down the road, economists said.

"I think they may have to do at least one more rate hike next year" to slow the economy to a cruising speed the Fed is more comfortable with, said David Jones, an economist with Aubrey G. Lanston & Co.

In announcing their decision yesterday, the Fed also moved its so-called policy directive, which is intended to signal future interest rates moves, to neutral from one tilted toward raising rates.

The Associated Press and
Star-Bulletin reporter Russ Lynch
contributed to this report.

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