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Rate cut expected The Federal Reserve's surprise cut of interest rates will help Hawaii's economy by attracting Japanese tourists and giving a boost to the construction industry, economists say.
to benefit Hawaii
Isle economists say the Fed's
half-point reduction should boost
tourism and stimulate constructionFrom staff and wire reports
Hawaii's two biggest banks, Bank of Hawaii and First Hawaiian, lowered their prime loan rate today to 9 percent, from the 9.5 percent level that has been in place since May and was the highest since January 1991. Other island banks are expected to reduce their prime rate, which is charged for short-term loans to their most credit-worthy business customers.
The banks' rate cuts followed yesterday's move by the Federal Reserve to lower its federal funds rate, the interest banks charge each other on overnight loans, to 6 percent from a nine-year high of 6.5 percent.
It also cut its discount rate, the interest the Fed charges banks for loans, by a quarter point to 5.75 percent.
And the Fed said it was prepared to cut the discount rate by another quarter point at the request of Federal Reserve banks.
Those lower interest rates will make it easier for consumers and businesses to borrow, if they need to. Consumer spending and capital investment have been the engines of the nation's economic expansion, currently in its 119th month and the longest in U.S. history.
One impact of the national shift to lower rates will be to keep the dollar from rising against the yen, good news for Hawaii's tourism industry because it will keep the cost of Japanese travel to the islands from rising, said David Ramsour, a consultant on the Hawaii economy for a number of business clients.
"This will certainly not strengthen the dollar, or allow the dollar to strengthen. We're likely to see the dollar weaken, or at least no longer strengthen against the yen," Ramsour said.
Hawaii's economy in general should benefit, he said, because the state's economic recovery has been slowed by rising interest rates.
"Now there's not going to be any rate excuse for a recovery in Hawaii's economy," Ramsour said.
"This comes a bit late for Hawaii but is nonetheless welcome," said Ramsour, who believes the Fed should have dropped interest rates by a quarter point a month ago.
Mortgage rates had already moved lower in response to the Fed's expressions of concern last month about the possibility of an economic slowdown on the horizon. In Hawaii, 30-year mortgage rates have recently fallen below 7 percent.
Still, Ramsour said, mortgage rates are likely to become more attractive.
Bank of Hawaii economist Paul Brewbaker said tourism is already on a good growth track but the big impact in Hawaii of lower interest rates will come in the construction and investment sectors.
"Tourism is going to have a nice year this year, but it's really the construction side of the economy that's shifted into high gear," Brewbaker said.
Financing costs were already down in anticipation that the Fed would act to bolster the national economy and head off a possible recession.
"The low rate that's already there has been underscored by the Fed and that tends to be favorable for investment and construction, whether it's mortgage refinancing or business construction," he said.
"Construction financing, mortgage financing, home buying, those will all come through and basically return another year with a 3 percent or 3.5 percent increase" in the gross state product, he said.
Brewbaker also predicted a 2 percent rise in employment in the islands and not much inflation this year.
While the Fed had been expected to cut rates soon, the move shocked markets because the central bank made the decision in an emergency conference call rather that wait until its end-of-the-month meeting. Also, the half-point cut was the biggest reduction in more than eight years. Usually the Fed moves rates in quarter-point increments.
Wall Street embraced the unexpected announcement yesterday afternoon, sending the Nasdaq composite index up 14 percent, its biggest one-day gain ever, and the Dow Jones industrial average up 2.8 percent.
"The economy was suffering and the momentum was snowballing on the downside," said Stuart Hoffman, chief economist for PNC Financial Services Group.
"The medicine is being administered, so as we go through 2001 the economy's health should improve and we'll see stronger economic news in the spring and summer."
Economists said the rate cut will take months to work its way through the economy and energize growth.
Analysts predicted yesterday's action would be followed by further reductions as the Fed acts to ensure the current economic slowdown doesn't deteriorate into a recession.
Some believed an additional rate cut, probably of a quarter-point, could come at the Fed's regularly scheduled meeting Jan. 30-31, with another rate reduction at the March meeting.
Star-Bulletin reporter Russ Lynch and the
Associated Press contributed to this report.