Hawai'i hopes Fed rate cut provides economic boost

By Katherine Nichols
Advertiser Staff Writer

Today's expected rate cut by the Federal Reserve comes at a crucial time for Hawai'i's struggling economy and could provide a much-needed boost for struggling businesses and wary consumers.

The anticipated cut in the overnight rate would bring it to its lowest point in decades in an effort to enhance consumer confidence and pump extra money into an economy that some say entered a recession after the Sept. 11 attacks.

Since January, the Fed has reduced its federal funds rate, the interest fee banks charge one another on overnight loans, from 6.5 to 2.5 percent. Analysts expect it may lower it up to another half-point today.

In Hawai'i, experts hope a cut — which usually pushes down rates for mortgages and business loans — will offer an economic boost.

But while businesses and experts say that any action is better than none, the question remains whether it will be enough to boost consumer confidence shaken by terrorist attacks, military action, the threat of anthrax and thousands of layoffs.

"Anything that will help to boost the U.S. economy is a positive thing for Hawai'i," said Pearl Imada Iboshi, the state's chief economist. "Consumer confidence increases because they know things are being done. The more positive things you have happening ... the better. In and of itself, it won't be enough, but it's a step in the right direction."

Carol Pregill, executive director of Retail Merchants of Hawai'i, agreed that increasing consumer confidence will be the key to helping the state's economy and struggling retailers.

"If it really helps boost that, then it will help spending," she said. Still, she noted that consumer confidence is "a perception." And not just an economic one. "It's definitely tied into how well the country is doing."

With the outcome of U.S. military action in Afghanistan uncertain, that perception is shaky.

"I think we're a little bit reserved right now in our predictions," Pregill said. "We've never been in anything this serious before. It has far-reaching consequences."

So far reaching, in fact, that even though lower rates may be enticing, some Hawai'i residents say they won't necessarily be rushing out to spend more.

"We think that it would be an awesome time for us to buy a home, or improve on our home or make changes," said Trina Kaonohi, a stay-at-home mother of six children, ages 2 to 12, in Kailua. "A lot of our friends are refinancing. And we want to take advantage of the situation that the interest is so low. But it's kind of scary. What are we going to do if we lose our jobs?"

That caution will also affect the family's Christmas purchases.

"We usually go all-out for our kids," said Kaonohi, whose husband repairs air conditioners. "But this year I think it's going to be more wisely spent. We're thinking twice about what we're doing with (our money)."

Spending in the near-term also may be affected because any Fed rate cut is unlikely to affect credit-card interest rates, said Wendy Burkholder, Neighbor Island manager of the Consumer Credit Counseling Service of Hawai'i, a nonprofit community service agency.

That's bad news for Island consumers sliding deeper into debt because of jobs lost after the Sept. 11 attacks.

The interest rates on consumer credit cards now range from about 14 percent for credit-union cards, to about 16.5 percent or 17 percent for local bank credit cards, to 19.99 percent and higher for most Mainland bank industry credit cards, she said. Previous Fed rate cuts this year have not brought those rates down, she said.

Still, lowered rates will affect many types of loans and mortgages, and could provide an added boost for big-ticket retailers such as home sellers and auto dealers.

So far, car sales have remained generally strong since Sept. 11, but the reason isn't necessarily the Federal Reserve. This time, manufacturers were a step ahead, many of them offering zero percent financing on new car loans.

"The manufacturers got tired of waiting for the Feds to do something," said Mike McKenna, president of McKenna Motorcars. The lowered rates "have been a great boon for us."

Joe Nicolai, president of JN Automotive Group, said lowered rates from a Fed cut will help but cannot come close to easing the impact of Sept. 11. "What has kept things going are these manufacturer-subsidized rates. And the fact that they put timelines on them induced people who would not normally be in the market to buy a car to buy one."

Cars are not the only big-ticket items selling well. Home sales are one of the few bright spots in Hawai'i's economy, with buyers encouraged by low mortgage rates.

The average 30-year mortgage in Hawai'i cost a borrower 6.30 percent last week. Yesterday, the Honolulu Board of Realtors reported O'ahu home and condominium resales rose 13 percent in October over a year ago.

A Fed rate cut today could help propel those gains, as well as spark more mortgage refinancing. That, in turn, could let Hawai'i residents lower their monthly mortgage payments and free up money for other items.

But whether any rate cut will have an economic impact all ultimately depends on people's attitudes.

"It's all psychological," said Rhona Ako, a mother of three in Kahala. "We're still freaked out by the media."

Ako said that although her husband, a dentist, has a secure job, other people who are losing their jobs are also losing their insurance, affecting his business substantially.

The Akos have decided to obtain a second mortgage to remodel their home, but Ako noted, "We've been telling the kids, 'This year it's going to be kind of mellow for Christmas.' "

Advertiser staff writer Susan Hooper contributed to this report. Reach Katherine Nichols at knichols@honoluluadvertiser.com