Fed's rate cut spreading through bank system

Advertiser Staff and News Services

Banks began cutting their prime rates yesterday after the Federal Reserve reduced a benchmark interest rate to its lowest in more than 40 years.

In Hawai'i, First Hawaiian Bank and Bank of Hawaii yesterday lowered their prime lending rates 50 basis points, to 4.25 percent.

American Savings Bank said it also is lowering its prime rate to 4.25 percent, effective today.

Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp., FleetBoston Financial Corp., SunTrust Banks Inc., KeyCorp, Wachovia Corp and SunTrust Banks Inc. also cut their prime rates.

Corporate and consumer loans are linked to the prime, which banks offer to their best customers. The cost of car loans, mortgages and some credit card purchases may fall because of the lower rate.

Banks won't be able to reduce what they pay out in interest by the same amount that they have lowered what they are charging borrowers.

"It's going to hurt bank earnings short-term," said Wayne Bopp, who helps manage $30 billion at Fifth Third Bancorp. "Hopefully, more people will borrow at 4.25 percent interest and they'll make it up on volume."

The Fed on Wednesday reduced the target interest rate on overnight loans between banks to 1.25 percent from 1.75 percent, a sign the central bank is concerned the U.S. economy needs a boost.

A 4.25 percent prime rate is the lowest in the United States since 1959, when it was 4 percent.