Federal Reserve rate cut to boost Hawai'i economy

By John Duchemin
Advertiser Staff Writer

While the Federal Reserve's seven short-term interest rate cuts this year have made the news, long-term interest rates have quietly dropped — an unheralded event that could be an even more important boost for Hawai'i in the months and years to come.

After a quarter percentage point slice yesterday, the nation's central bank has cut its benchmark short-term lending rate by half in little more than a year. The Fed has kept up the rate cuts to stimulate demand in the face of weak corporate profits and a global economic slowdown that continue to weigh on the U.S. economy.

Those rate cuts make short-term loans — those with a payoff of a few years or less — more affordable to consumers and businesses. Most affected are credit card rates, auto loans, furniture financing and other debts that can be paid off quickly.

That's good news — but not as good as the rate news for longer-term loans.

Interest rates for long-term loans are down more than one percentage point from last year. And such a favorable change in long-term interest rates does more to stimulate big-ticket investments — including commercial development and home purchases — than a drop in the short-term rates, said Paul Brewbaker, economist with Bank of Hawaii.

Long-term rates are determined on the bond market, which tries to predict the direction of Federal Reserve interest policy. In this case, long-term rates dropped several months before the Fed made its first rate cut in 2001.

Since October 2000, for example, Hawai'i's average annual percentage rate for 15-year mortgages has fallen from 7.51 percent to 6.47 percent last week, according to an Advertiser analysis of Honolulu Board of Realtors data. Those lower rates mean about $130 less per month in payments for a $150,000 home loan.

The lower long-term rates have helped stimulate banking activity, increase construction and solidify the housing market in Hawai'i, Brewbaker and others said.

And Brewbaker said the drop in long-term rates couldn't have come at a better time, given that the Mainland and Asian slowdowns are causing Hawai'i's economic growth to slow slightly — though it remains near its best level since the 1980s.

"When you put it all together, you have an economy that's managing to grow at 2 to 3 percent after inflation, and employment that's near full," Brewbaker said. "When you add in the lower interest rates, it's clear that nothing is at risk. There's enough stimulus to keep things rolling, though I wouldn't use the term 'jump-start.' "

The state is sticking to its prediction that Hawai'i gross state product will grow at about 2.7 percent this year, when adjusted for inflation.

"We hope the lower rate helps, but it doesn't really change our expectation," said Pearl Imada-Iboshi, head of economic research for the state Department of Business, Economic Development and Tourism.

The direct effects of lower long-term rates can be seen at banks, where many more homeowners are refinancing their mortgages to take advantage of the reduced interest.

First Hawaiian Bank has done more home loans in the first seven months of 2001 than it did in all of 2000, said Vernon Omori, senior vice president in the bank's real estate division. Of these loans, about 75 percent are refinances — a reversal from last year, when about two-thirds of the loans were brand-new mortgages. This is still good for the bank, which makes its money by selling the refinanced mortgages to mortgage specialists.

"People are moving quickly to take advantage of the lower rates," said Walter Horikoshi, senior vice president of credit administration at Central Pacific Bank, which has also seen refinancing activity increase. "If you're down about 1 to 1.5 (percentage points), that's significant enough that anyone with a rate of 7.75 percent or so will find refinancing worthwhile."

Lower long-term interest rates will also help entice Hawai'i businesses to make capital investments, Brewbaker said, pointing to a resurgence in construction.

Although major commercial projects are few in the state, spending on building is up, and construction jobs have increased at some of the fastest rates of any sector in the state.

Advertiser news services contributed to this report.