Tuesday, January 29, 2002

New rate cuts unlikely as Fed's optimism rises

By Jeff McKinney
The Cincinnati Enquirer

        The Federal Reserve's 11 interest rate cuts in the past year appear to be finally kick-starting the economy, leading many economists to expect no action by the Fed when it starts a two-day meeting today.

Jennifer and Tom Marks sit in their family room with daughter Katie, 2. Falling rates persuaded them to get a $10,000 line of credit to make improvements on their Milford home.
(Brandi Stafford photo)
| ZOOM |
        The policy-setting Open Market Committee of the Fed is expected to leave the target federal funds rate — the rate banks charge each other for overnight loans — unchanged. That's after Federal Reserve Chairman Alan Greenspan said last week that he sees some key economic indicators displaying signs of recovery.

        The Fed has trimmed its federal funds target rate 4.75 percentage points to 1.75 percent — an unprecedented 11 cuts since last January.

        “His comments suggest that the economy may have hit bottom, and that there is no urgency to cut rates in January or possibly any more this year,” Stuart Hoffman, chief economist at PNC Financial Services Group Inc., said.

Lower borrowing costs
        Consumers have been taking advantage of the lowest rates in four decades to remodel and buy homes, refinance mortgages and pick up a new car, among other things.

        In fact, consumer spending and the housing market are two of the few bright spots in an economy that officially went into recession in March.

        Mr. Hoffman said the prime rate — the rate banks charge their most creditworthy customers — is at a

        40-year low, at 4.75 percent, down from 9.5 last January.

The Sheas: home repair

        The lower rates persuaded Carol and Terry Shea to borrow $20,000 to make repairs and additions on their $300,000 home in Hyde Park. They also refinanced a portion of their mortgage.

        By getting a line of credit at Third Federal Savings & Loan this month, at the prime rate of 4.75 percent, the Sheas used the $20,000 for improvements, including converting a bedroom to a family room, changing attic space into a bedroom and repairing their roof.

        The Sheas also refinanced in November the $130,000 left on a 15-year, fixed-rate loan with a 6.75 percent rate. By switching to a 30-year, fixed-rate loan with a 6.375 percent rate, they cut their monthly mortgage payment to about $850 from almost $1,200. ;

Vince Bryant: business upgrade

        For entrepreneur Vince Bryant, falling rates allowed Queen City Restaurant Group, where Mr. Bryant is chief executive, to obtain a $400,000 loan in October from Firstar bank, as part of a $1 million renovation at Bella Cincinnati, formerly Plaza 600, the downtown restaurant attached to the Aronoff Center for the Arts.

        By securing a 4.37 percent rate, Mr. Bryant said that reduced Bella's monthly costs by $1,000, compared with what it would have cost if it borrowed the $400,000 in October 2000, when the prime rate more than twice that.

        “The Fed action allowed us to expand, invest and open Bella,” Mr. Bryant said. “It was a key component to our investment, thus our reinvestment in downtown Cincinnati.”

        Mr. Bryant, whose firm also owns Teller's of Hyde Park, Jump Cafe and Bar in Over-the-Rhine and Watson Bros. Bistro and Brewery in Blue Ash, also said the reduced prime rate will save Queen City Restaurant Group $25,000 to $30,000 a year in interest expense on loans for all of its restaurants.

The Markses: new amenities

        The lower rates persuaded Jennifer and Tom Marks of Milford to get a $10,000 line of credit from Third Federal to make home improvements. It also persuaded the couple to avoid the hassle of shopping to buy another home to get amenities they wanted.

        The Markses used the $3,000 to have hardwood floors added to the kitchen and family room and remove a wall between their kitchen and family room, creating a new open room. They have $7,000 left on their line, giving them the option to make more improvements later.

        The Markses might not have had the work done had interest rates not dropped. A reason: The couple did not want to tap into profits made from stock investments or into their savings to complete the projects.

        “With the minimal interest we pay, this made it more cost-effective for us,” Mrs. Marks said. “It just made more sense to do it this way, plus we get a tax deduction.”


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