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Economists:
Rate increase
shouldn’t hurt
isle recovery

They say Hawaii
is not as sensitive
to Fed moves

From staff and wire reports

Two local economists say a rise in interest rates should not have much effect on Hawaii's fledgling recovery -- but it won't help either.

"Hawaii is not as interest rate sensitive as other economies," said Leroy Laney, an economics professor at Hawaii Pacific University and consultant to First Hawaiian Bank.

"We are a service economy" and less reliant on borrowed capital than the industrial states, he said. "So in that sense it's not as serious a blow to this economy," Laney said.

Nevertheless, it won't be good for Hawaii, he noted.

Yesterday, the Federal Reserve increased the federal funds rate -- which banks charge to each other for overnight loans -- by a half a percentage point to 6.5 percent. The move was expected but was the largest increase since a similar rise in February 1995. The last time the federal funds target was higher was in January 1991, when it was 6.75 percent.

In response, commercial banks on the mainland and in Hawaii nudged up their prime lending rate -- the benchmark for millions of consumer and business loans -- by the same half point. Those increases left the prime at 9.5 percent, its highest level since January 1991, when the country was in its last recession.

The central bank is trying to slow the nation's record-setting economic growth because it fears the expansion probably cannot be sustained without sparking inflation.

But while the mainland has boomed through much of the 1990s, Hawaii's has languished. Only recently has the state recorded positive economic signs such as rising home sales, higher tax revenues and booming retail sales.

Laney said the Fed has to look at national issues and cannot manage fiscal policy at a regional level. Hawaii's economy is not as strong as the nation's and doesn't need to be held back, he said.

"It's not going to help us here, obviously," Laney said.

Michael Sklarz, director of research at the Hawaii real estate firm Prudential Locations Inc., said medium and long-term interest rates are not affected much by the Fed's changes in short-term rates and, anyway, rates are still relatively low at just above 8 percent for a 30-year, fixed-rate mortgage. Also, in his opinion, interest rates don't have much of a direct effect on the economy.

"When we think back to much of the '90s when interest rates were low or declining, that didn't seem to have much of a positive effect on the our economy," Sklarz said. "So we can't say there's a direct relationship between the economy and interest rates," he said.

As long as the Fed is only shifting its rate by a quarter or half of a point, "it's not going to be that disruptive," Sklarz said.

The Fed's interest rate increases are expected to continue.

Yesterday's action marked the sixth time the Fed boosted interest rates since last June. The five other increases were by a quarter point.

In a statement on yesterday's increase, the central bankers in Washington indicated they would remain vigilant in their fight against inflation.

Many economists believe two more half-point moves are likely at the Fed's next meetings on June 27-28 and Aug. 22. But other analysts said rate hikes of that size will only occur if the economy fails to show signs of slowing. "Clearly further rate hikes are part of the Fed's anti-inflation game plan," said David Orr, economist with First Union of Charlotte, N.C.

Economists note that Fed rate increases normally take a year before they start to have a significant impact on economic activity. Given the Fed began raising rates last June 30, that would imply that it will be after June of this year before activity really begins to slow.

Many analysts believe that is just what will happen. While the overall economy, as measured by the gross domestic product, roared into the new year at a 5.4 percent rate, they believe growth in the second half of 2000 will slow to around 3.5 percent.

The Fed hopes to repeat its success of 1994-95, when it boosted rates in seven moves, including three half-point increases and one three-quarter-point boost, to slow economic demand, keep inflation under control and prolong the expansion, which is now in its 10th year, the longest in history.

The Fed yesterday also increased its largely symbolic discount rate, the interest it charges for direct loans to banks, by a half point to 6 percent.

Too-fast economic growth "could foster inflationary imbalances that would undermine the economy's outstanding performance," the Fed said, explaining its action yesterday.

Asked whether the Fed's effort to slow the booming economy could harm Vice President Al Gore's presidential chances, President Clinton said he wasn't concerned because the administration was doing its part to keep interest rates as low as possible by running federal budget surpluses and paying down the national debt. "The Fed will do its job and we will do ours," Clinton said.

However, the Fed's action was not without criticism.

"Once again, the interests of the American people have given a back seat to the interest of money-center banks," which can make loans at the higher interest rates, said Sen. Byron Dorgan, D-N.D.

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