The Federal Reserve cut interest rates Thursday for the first time in three years, and major banks responded by lowering their prime rates.
The decision to lower the federal funds rate from 6 percent to 5.75 percent signals that the Fed is concerned about the condition of the economy, which has slowed in recent months.
The first to benefit from the cut in the funds rate, which banks charge one another for overnight loans, will be borrowers with certain types of adjustable-rate loans and businesses in interest-rate-sensitive industries.
In Spokane and North Idaho, lower interest rates could help boost home and car sales. Strong sales in those industries are a key to maintaining the region’s economic growth.
Home sales have slowed significantly this year, and auto sales have fallen short of expectations.
Interest rates already were low by historic standards, so local Realtors don’t view Thursday’s cut as a panacea. But it beats the alternative.
“We were sitting around during the winter thinking about how we were going to sell homes at 11 percent interest rates,” said Brad Jordan of The Jordan Co./Better Homes & Gardens Real Estate Service in Coeur d’Alene.
While a quarter percent means just a few dollars a month less for car loans and a few more dollars per month less on payments on 30-year mortgages, the move should boost consumer confidence.
“I think the impact will be mostly psychological,” said Chris Marr of Foothills Lincoln/Mercury/Mazda in Spokane. Marr also is president of the Spokane New Automobile Dealers Association. “Consumers right now are looking for reasons to be optimistic out there.”
While Spokane’s auto dealers haven’t seen some of the big dropoffs in sales that others have seen nationwide, local car lots have fallen short of the record years they had forecast, Marr said.
With make-or-break sales months of July, August and September ahead for local dealers, the rate cut could not have been better-timed, he said.
Realtors and home builders, likewise, are in the middle of their key season. They’re hoping the Fed will lower rates further, which many economic analysts think might happen.
“I think it will have more of an impact if they lower it another quarter point or more,” said Jack Hatch of Jack Hatch Co., a commercial and residential real estate firm that works mostly between the Spokane Valley and Post Falls.
“It will stimulate the construction business and industrial expansion around here.”
A glut of new homes in North Idaho’s market, in particular, has slowed sales there, Hatch said.
Still, the Spokane-Coeur d’Alene economy has outperformed the nation’s for five years.
While local businesses have been worrying about slower growth, the talk nationally has been about recession.
The Clinton administration has been quietly lobbying for a rate cut, hoping lower rates will give the economy a lift in 1996 when the President has to run for re-election.
In theory, lowering interest rates stimulates the economy by lowering the cost of money. That encourages consumers to buy goods and companies to expand.
But many other factors - such as wage levels, foreign competition and consumer psychology - influence the economy. The effect of interest rate cuts often is gradual.
For example, despite repeated cuts in interest rates, the economy stayed in recession in 1991-92. It didn’t respond to the Fed’s moves until 1993, after President Clinton had been elected by emphasizing the sluggish economy.
However, the administration was cautious in its comments Thursday, sensitive to charges the President may be manipulating the central bank in advance of the election.
“The Federal Reserve is independent and the administration does not comment on specific monetary actions taken by the Federal Reserve,” Treasury Secretary Robert Rubin and Joseph Stiglitz, chairman of the president’s Council of Economic Advisers, said in a joint statement.
The two officials said they believed “many of the factors behind the recent weakness are likely to operate with less force in the future” and the economy’s prospects remained favorable.
Private economists generally applauded the Fed’s move.
“The Fed did the right thing,” said Robert Dederick, economic consultant at Northern Trust Co. in Chicago. “This doesn’t guarantee that there won’t be a recession, but it certainly improves the odds that we can avoid one.”
, DataTimes ILLUSTRATION: Graphic: Interest rate drops