Rate cuts favor firms over families

Lower interest rates may make investors on Wall Street happy, but what they do for everyday working people with families, a mortgage and mounting credit card debt is less clear.

Financial experts in much of northern and eastern Maine said Wednesday that while the lower interest rates may allow people to buy a home or car for less, the real impact of the interest rate cuts will be on the businesses seeking to expand their operations. As those firms take on new projects, according to University of Maine finance Professor Bob Strong, the demand for planning, construction materials and additional employees is likely to increase.

The Federal Reserve announced Tuesday that it was cutting interest rates by 0.5 percent, citing concerns that the struggling American stock market and economy needed a boost. The interest rate cut, Strong said Wednesday, “won’t affect a lot of people at all, but it will affect some because of the nature of their business. But [the cut] was just enough of a tweak that they say, ‘OK, we’ll do it.'”

And with such increases in employment and productivity, Strong said everyday people tend to benefit in the long run through higher wages and more available jobs. But beyond those long-term considerations, many consumers may be able to benefit in some way by refinancing their mortgages or car loans.

Strong said credit card interest rates, and other forms of consumer debt could also fall – but that depends largely on the agreement made between the credit card company and the cardholder. MBNA America, a Delaware-based credit card issuing company, didn’t return a phone call seeking comment on the rate reduction.

Ed Hennessey, president of Machias Savings Bank, said the reduction in interest rates may decrease some mortgage rates and car loans, but added that some banks’ 30-year mortgage rates may not be altered by the reduction. “I think [the rate cut] will have an incremental effect on some of our rates,” Hennessey said. “On mortgages, I firmly believe that most of this one-half point drop is already built into our 30-year mortgage rates.”

Hennessey said many people have contacted the bank regarding the possibility of refinancing, but his staff has advised them to wait as long as three months in case the rates drop even farther. “My advice to them is not to jump on the bandwagon right now,” Hennessey said. “I truly do think we have not seen the bottom of these interest rates. So I say sit tight for 60 to 90 days.”

Steven St. Pierre, vice president of First Citizens Bank in Presque Isle, said Wednesday that a reduction in interest rates by the Federal Reserve Board could take a few weeks to be reflected in lending rates. But in the meantime, St. Pierre said customers have already begun shopping around for the lowest rates – putting pressure on the banks to provide the lowest lending rates possible.

“People know where the rates are much more than they used to,” St. Pierre said. “They are very street-wise when it comes to rates. It keeps us all on our toes.”

Bill Lucy, executive vice president of Bangor-based Merrill Merchants Bank, said Wednesday that while people may tend to wait to refinance or buy a home hoping that rates may drop further, he advises them to snatch the good deals while they are available.

“I think it’s very difficult to predict where interest rates are going to go,” Strong said. “People have to look at their own personal financial situation and determine what is comfortable and right for them. It’s almost like buying in the stock market. It’s very difficult to determine where the bottom is on a stock.”

Meanwhile, Strong said interest rate reductions are usually popular with the stock market because the rate of return on investments such as certificates of deposit and bonds become much lower. As a result, people tend to invest in stocks as a means of achieving higher returns.

But lower returns on bonds and CDs, Strong said, mean that elderly residents with fixed incomes will have less money coming from those traditionally stable investments. While interest rates continue to fall, Strong suggested that those seeking stable returns vary the time of maturity on their CDs as a means of hedging against the cyclical nature of interest rates.

Still, area bankers admitted it would be tough for depositors fearful of the stock market to find a safe haven. “The pain is felt on the depositor’s side,” Lucy said. “Particularly for older folks who depend on those fixed income deposits.”

St. Pierre agreed, saying that savings accounts and CDs will become less attractive to people looking to save or invest their money. “Right now their options are kind of scary. They are going to feel the pinch, but the cost of our product is down and we need to follow suit with that.”

Yet it is not only the elderly who are “pinched” when interest rates drop. Many municipalities and county governments invest some of their tax-anticipated revenues or TAN), in CDs as a means of generating extra revenue. The lower rates could mean that some towns will see less of a return on those investments.

Robert Lakin, Hancock County treasurer, acknowledged that the lower interest rates could lower the return on TAN investments, but added that the cost of securing those funds may also be lower as a result of the rate reduction.

“If a municipality went out for its TAN it would probably get a pretty good rate, perhaps 3 percent or less,” Lakin said. “But when those rates go down, the CD rates go down as well.” But besides those rate reductions, Lakin said a municipality might still be able to invest the money for more than the cost of borrowing it. “The spread might be a little bit tighter,” Lakin said, “but I expect it will be about the same.”