Experts say yes to investment and spending, maybe to
BY KIM CHIEVRUE Times Business
The latest drop in interest rates will force consumers
to make some new decisions, according to financial advisers and
The Federal Reserve lowered the federal funds rate Tuesday by a
quarter-point to 3.5 percent. The reduction, the seventh this year,
prompted some banks to lower the interest rate on loans to a level
not seen since 1993.
"If you haven't refinanced, now is a great time to do it," said
Greg Mount, senior economist at Bank One in Chicago. "The housing
market has done quite well, and home prices have continued to
Some experts say home equity has given consumers the ability to
borrow money that has kept the economy out of recession. But they
disagree on whether the time is finally right to refinance.
Robert Frick, senior editor of Kiplinger's Personal Finance
magazine, said the Fed announcement won't instantly make refinancing
more attractive. The mortgage markets have now extended outside
banks to "a lot of different players," he said.
"Mortgages are based on supply and demand. Even though the cuts
have been steep, so many people have wanted to refinance, the demand
has kept the interest rate relatively high."
A bigger impact on mortgage rates will be the dwindling pool of
people seeking refinancing. Rates in both the Gary and Chicago areas
Tuesday averaged just under 7 percent on a 30-year fixed mortgage.
Now that the large group of people who wanted to refinance at 7 or
7.25 percent has done so, Frick said, mortgage bankers might have to
lower their rates, to spur demand.
A boost for businesses
Andrew Kyres, vice president of business development at Sand
Ridge Bank in Schererville, said the Fed's announcement might
encourage business owners to think about expanding.
"Hopefully, the banking industry will see more demand in the
commercial loan sector," he said. However, because most commercial
loans are adjustable according to the prime, "it's not something
where you wait until they hit bottom. The (loan) rate will adjust
anyway if rates go up."
Even if banks do drop their lending rates, he said, it probably
will not help some businesses, such as the faltering steel industry.
The cut in interest rates can take nine months to a year to show up
as increased earnings.
"Many people think the Fed has been too slow in bringing rates
down, but it's hard to say if that's true. If they do it too
quickly, then you have inflation instead of steady growth. The goal
is slow, moderate growth."
Manufacturers still will struggle for some time, unless consumer
spending reaches levels that prompt them to increase manufacturing,
the experts say. Indiana lost 12,000 manufacturing jobs between June
2000 and June 2001.
Spend, but keep investing
Mount said the cut in interest rates might prompt some people to
invest their tax rebate checks in the stock market.
"Now is a much better time to buy than it was 18 months ago," he
said. "If the economy picks up, as we expect it will, profits will
Kiplinger's Frick advises individuals with diversified investment
portfolios to stay the course until the economy improves.
"Don't sell. You might be selling at the bottom," he said. "But
stay diversified. A lot of people had too much of their portfolio in
technology, and now they are really paying the price.
"And don't stop putting money into IRAs and your 401K plan.
People tend to increase their contributions when the market is
riding high, and then when it goes down, they pull back. It's human
nature. But it's exactly the wrong thing to do."
Good news, bad news
Not everyone will benefit from the new interest rates. Joe
Pellicciotti, director of the school of public and environmental
affairs at IUN in Gary, said cuts in the interest rate are "terrific
for people in the stock market, and consumers who plan on purchasing
large items like homes and cars and appliances."
But it's not all good news for "people who rely on more
traditional savings instruments like savings accounts and CDs," he
said. "As the interest rates go down, returns on CDs are very, very
The Fed's action will be interpreted as a signal that worse news
is coming down the line, and will lower stock prices, said P.
Raghavenda Rau, professor of finance at Purdue University's Krannert
School of Management. Whether this will affect you positively
depends on your age.
People not close to retirement, who are investing a set amount on
a regular basis, will be able to buy more stock for the same amount
of money, Rau said.
"But if you're close to 65, and trying to use this money to live,
when you try to sell the stock now, you'll be getting less money."
Kim Chievrue can be reached at 219-462-5151, ext. 346, or by
e-mail at email@example.com.