Fed may cut interest to boost confidence
Advertiser Staff and News Services
The terrorist attack that tore through the heart of New York's financial district last week could cause drops in short- and long-term interest rates, including the rates on home loans, car loans and bank accounts in Hawai'i.
Private economists are predicting the Federal Reserve Board's efforts to supply additional money to banks will soon be followed by further interest rate cuts, possibly before the next Fed meeting Oct. 2., in an effort to bolster consumer confidence that may have been shaken by last week's terrorist attacks.
The Fed has already cut interest rates seven times this year in an effort to jump-start sagging economic growth. If it cuts rates again, the effect would be to push down interest rates for credit cards, car loans and other short-term financial tools.
And when key American financial markets reopen tomorrow, if investors increasingly put their money in "safe" investments like bonds, the rising demand will likely push interest rates further downward. Mortgage rates, closely tied to the long-term bond market, could also fall.
Last week it was unclear whether investors would help in the push. The bond markets reopened Thursday, but with only light trading.
"The trading level is very small, so it's hard to get a clear direction on exactly where rates are going," said Jeff Bamer, vice president in the residential loan department at First Hawaiian Bank. "But most of the thought out there is that when stocks open and trading gets resumed there could be a flight to quality, a move to safer havens, with the bond as the favorite."
Long-term rates will probably drop some — but the effect could be minimal because rates are already quite low, said Walter Horikoshi, senior vice president for credit administration at Central Pacific Bank. The average Hawai'i mortgage rate is 6.4 percent for 15-year mortgages and 6.8 percent for 30-year home loans, according to an Advertiser analysis of Honolulu Board of Realtors data.
"The chances must have increased for a move by the Fed," said Norman McChesney, who helps oversee about $44 billion at Aberdeen Asset Management Ltd.
The U.S. central bank declined to comment on what it might do with rates. "The Fed has a long-standing policy that it doesn't comment on market rumors," said spokeswoman Lynn Fox.
"I think the Fed is going to move when we see some operation of the U.S. equity market," said Jens Peter Soerensen, a bond analyst at Danske Bank A/S in Copenhagen. "Fifty basis points is very likely."
But not everyone expects the Fed to cut rates. Lou Crandall, chief economist at Wrightson Associates in New York, said the central bank is probably more interested in making sure there's enough money in the banking system to keep the economy running.
"Since this is not a crisis that started in the financial sector, it's more likely the Fed will view their role as providing liquidity rather than reducing the price of that liquidity," he said.
