Fed action may have low impact

BANGOR – To the consternation of many consumers, Federal Reserve Chairman Alan Greenspan is not the fairy godmother of the nation’s economy. His magic wand to drop interest rates does not cover all forms of consumer borrowing.

“[Borrowers] think Alan Greenspan waves his hand and everything drops a half percent,” said Keith Marston, a loan officer with Schaefer Mortgage Corp. in Bangor. “It doesn’t work that way.”

The interest rates on credit cards, home equity loans, and some automobile loans will be dropping this week, probably by Friday, but mortgage rates probably will not, said John Moore, senior vice president for marketing at Bangor Savings Bank.

“They’ve already bottomed out pretty much for the year,” he said.

Greenspan’s short-term rate drop, the fifth this year, directly affects variable loan rates that are set at prime plus a certain number, Moore said. Businesses that have secured loans for equipment purchases or working capital at a variable rate will not be paying out as much in interest. That was Greenspan’s intent – to free up cash for businesses so they can use it to either keep operating or grow.

“They get a savings [Tuesday],” Moore said.

Mortgage lenders, though, are taking a wait-and-see approach to the Fed’s action. Of the five rate cuts this year, three have favorably affected mortgage rates, one has not and the latest one remains speculative.

“Everybody’s in a holding pattern,” said Marston, noting that the bond market – the foundation for mortgage rates – was “all over the place” Tuesday. Because of that, mortgage rates were remaining at about 71/2 percent Tuesday.

On Friday morning, prior to new mortgage rates being posted at 11 a.m. that day, the rates were 7? percent, said Terrence Robinson, a mortgage officer at Wells Fargo Home Mortgage, formerly Norwest Mortgage, in Bangor.

“The rates go up before they drop,” he said.

When word started circulating in financial circles late last week that the Fed probably would reduce short-term interest rates at its meeting Tuesday, banks and other lenders raised their mortgage rates, Robinson said. Then if the Fed reduced rates – as it did – mortgage rates could follow suit if other variables, such as the bond market, were favorable to doing that.

For consumers who visited mortgage companies in the last couple days to discuss loans and rates, this up-and-down action is supposed to give the illusion that the borrowers are getting a break, Robinson said.

“You can’t necessarily predict an increase or decrease in rates,” he said. “It’s weird how it works sometimes, and frustrating. Hopefully [today] they [lenders] will bring us back to where we were at the beginning of last week.”

Even if mortgage rates go down, Bob Strong, a professor of finance at the University of Maine, said he doesn’t think it will make much of a difference in the overall price of a new home.

In a booming home-buying market, similar to what is being experienced in Bangor and surrounding areas, what changes most is the price of the property and not the interest rate. Buyers could be spending more in one area than what they are saving in another.

The money saved by consumers because of changes in variable interest rates may not last long in peoples’ wallets, either, Strong said. Increased healthcare and energy costs are absorbing any benefits that have come from the Fed’s five rate reductions this year.

Whether the economy will be resuscitated, as Greenspan would like it to with his rate cuts, though, remains uncertain. It’s up to consumers to decide if they have the money to spend, Strong said.

“There’s a lot of psychology that’s involved with that,” he said, particularly whether they have the confidence to spend or whether they should hold back. “In the long run, it’s the people who determine how something happens.”

Consumers might have begun to gain some confidence in their financial decisions in January, when Greenspan announced his first rate cut of the year. If they did, their actions should be reflected in economic reports in the next couple months, Moore said.

“It usually takes six months,” he said. “We’ll guess what, next month is June. It’s cool.”