Tuesday, 1 February 2000
http://www.azstarnet.com/public/dnews/0201N1.html
By Jonathan J. Higuera
The Arizona Daily Star
The price of money is about to go up.
And if you're not worried about it, perhaps you should be.
When the Federal Reserve Open Market Committee meets today and
tomorrow - and raises interest rates between a quarter and a half
of a percentage point, as experts expect - the ramifications will
be broad.
On one level, those hit first will be consumers in the market
for a new home or car, as well as holders of credit cards and
home equity loans with variable rates.
Just about anybody who needs to borrow money, including a business
owner looking to expand, will feel it.
At another level, all consumers pay the price eventually when
the cost of money rises. If you don't think that grocery stores
or other retailers pass along the higher costs of borrowing, think
again.
``A quarter of a percent doesn't mean a lot to (Fed Chairman)
Alan Greenspan, but to a person living paycheck to paycheck it
means a lot,'' said Georgia Swanson, a payroll supervisor for
the Pascua Yaqui Tribe.
It means even more when you consider the Fed has already raised
the federal funds rate - the Fed's main monetary benchmark - four
times since mid-1998. The federal funds rate sets the borrowing
rate that banks pay to get money from the Federal Reserve.
Swanson tries to impart the importance of interest rates and compound
interest to her 21-year-old son, a junior at the University of
Arizona. She had to learn the hard way. She is in a debt management
program offered by Consumer Credit Counseling Services Southwest,
with about $13,000 left to pay off.
She advises her son to be prudent in taking out student loans,
because those interest rates are also affected as part of the
ripple effect.
Last year at this time, home mortgage loans were running at about
7 percent. Now they are in the 8.25 percent to 8.5 percent range.
In real terms, that means a mortgage payment of principal and
interest on a $135,000 loan has gone from $898 at 7 percent to
$1,038 at 8.5 percent.
``If you're buying a $300,000 home, you can probably still afford
it,'' said Barbara Tarrish, sales and marketing manager at A.F.
Sterling Homes. ``But first-time buyers can be knocked out of
the housing market. It also causes buyers interested in moving
up to become skittish.''
Some mortgage lenders have also seen another impact.
``We're seeing some people get off the fence and decide to buy,''
said Greg Renkenberger, a senior vice president at Sterling Capital,
a national mortgage lending company. ``The price of homes doesn't
get cheaper. It could be more expensive to wait.''
Paradoxically, the Fed's moves are characterized as a pre-emptive
strike to curb inflation. It's akin to letting the air out of
an over-inflated tire, economists say. The trick is knowing just
how much to let out. With the national economy running red hot
for several quarters now, Greenspan sees it as his job to slow
it down.
That's come in the form of small increases in interest rates.
To be fair, Greenspan issued three quick rate drops at the end
of 1998 in response to the global financial crisis. That brought
interest rates to historic lows and helped halt worldwide panic.
With that crisis behind him, Greenspan is now looking to tap the
brakes on the U.S. economy's growth. The gross domestic product
rose at a 5.8 percent annual rate in the fourth quarter, the Commerce
Department reported Friday.
The increase in the federal funds rate usually has an impact on
the prime rate set by banks.
``History has shown that when the Fed goes up a quarter, banks
follow,'' said Steve Roman, spokesman for Bank One, the state's
largest bank with more than a million customers in Arizona. ``There
is no national prime rate, but banks usually get in line based
on competition.''
The prime rate is the main benchmark for borrowing costs, although
it is not the only rate used. Read the fine print on variable-rate
credit cards and it will usually tell you that the card's rate
is tied to the prime. And 80 percent of credit cards are variable-rate.
Fed action would raise payments for people who have home equity
loans or other credit tied to the prime rate.
``I don't think it is going to cause a major crimp with any consumer
at this time,'' said Doreen Woo Ho, executive vice president of
Wells Fargo home equity.
``We've been through three (rate hikes) already, and while it
does accumulate, it's not at the point of being a major pinch
in the pocketbook,'' she said.
To many consumers, an increase in the prime rate translates into
higher prices on consumer goods and possibly bigger payments if
they have credit card debt.
If the rate change makes consumers pause before deciding to buy
a new car, home or major appliance, then the Fed's policy of raising
rates has worked, said Marshall Vest, a senior economist at the
University of Arizona.
``It's better for the Fed to slow the economy than to let it continue
to burn until we get inflation back in the system,'' he said.
``Then the Fed has to really tighten the screws, and we have a
recession.''
He doubts that a quarter-percentage-point increase will do much
to dampen consumers' enthusiasm. ``It will take quite a bit to
get consumers' attention,'' he said. ``Jobs are plentiful; times
are good.''
But in a city where the average annual pay is $26,773 and many
families live at the margin, interest rate jumps can have a greater
impact than in wealthier communities, noted City Planner David
Taylor.
``We're not an affluent community where the only problem it presents
is that your stock portfolio doesn't perform as well,'' he said.
``We're consumers, and we're quite interest-rate-sensitive.''
It's especially critical because much of Tucson's economy relies
on construction and retail trade, Taylor pointed out.
Car dealers know that lesson, too.
``Whenever interest rates go up, sales go down,'' said Steve Christy,
owner of Galloway Chrysler Plymouth Jeep. ``And the opposite is
true.''
That said, he doesn't believe a quarter-percentage-point rise
will have a big impact on new-car buying, in part because of current
incentives being offered by carmakers.
But he still doesn't agree with the Fed's move.
``I don't think inflation is a threat,'' he said. ``I don't see
any indication that it's rising. . . . They (Fed officials) are
more concerned with the factors causing inflation rather than
inflation itself.''
But economists point to increased commodities prices as a sign
that inflation could be lurking. The price of crude oil, for example,
has nearly tripled within the last year.
``They are worried that the labor shortage will translate into
higher wages and secondly into higher prices,'' said the UA's
Vest. ``We don't see that yet at the consumer level, but we do
see it back in the pipeline.''
He notes it's the Federal Reserve's job to forecast where the
economy is going and act appropriately, even if it's hard on consumers.
``I'm part of Generation X,'' said Kim McGrigg, spokeswoman for
Consumer Credit Counseling Services. ``We don't know of tough
economic times. To me, 8.5 percent interest is high. We've spent
nearly 10 years with fantastic times.''
Arizona Daily Star business reporter Sara Hammond contributed
to this article.
------------------------------------------------------------------------