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  [PATH] 8:05 AM, Wednesday, August 22, 2001   


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Experts say yes to investment and spending, maybe to refinancing

BY KIM CHIEVRUE Times Business Writer
The latest drop in interest rates will force consumers to make some new decisions, according to financial advisers and local economists

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 appreciate."

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 pick up."

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 low."

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

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