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Borrowing stimulated by Fed’s interest cuts


Borrowing stimulated
by Fed’s
interest cuts
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Even if interest rates hadn’t been so low, Fred Frattaroli would have borrowed $350,000 last year to add a two-bay oil change and lubrication garage to the front of Triangle Car Wash in Lancaster Township.
On Dec. 11, the Federal Reserve Bank cut the interest rate from 2 percent to 1.75 percent, its lowest point since July 1961. At the beginning of 2001, the rate was 6.5 percent, but the Fed lowered its rates 11 times in 2001, trying to reverse the effects of a recession.
And that saved Frattaroli a lot of money. “It’s good timing, and it’s accidental, but it affected us considerably,” says the president of Triangle Car Wash Inc., a Palmyra company that owns 17 Central Pennsylvania car washes. On a 10-year, $350,000 loan, a cut of just 2 percent in interest rates shaves $350 off a monthly payment and $42,000 from the total interest paid.
It’s hard for the Fed to stimulate demand, but that’s what its Open Market Committee has been trying to do. And although the Fed rate doesn’t directly affect consumer and business loans, Central Pennsylvania bankers say lower interest rates spurred borrowing for houses, cars and business improvements.
According to figures published in the Sept. 14 Business Journal’s Top List of credit unions, $1.99 billion was loaned in 2000
versus $1.94 billion in 1999, a 2.7 percent increase. Figures provided to the Business Journal’s Top List about 13 Central Pennsylvania-area banks that were listed in both 1999 and 2000 showed $8.58 billion in 1999 loans versus $9.83 billion in 2000 loans. Figures aren’t available yet for 2001, but local lenders expected similar increases.
“Fulton Financial Corp. has had an increase in loans of slightly under 2 percent, so it’s a slower year than 2000 was,” says Richard Ashby, chief executive officer, chairman and president of Fulton Bank, headquartered in downtown Lancaster. But, he adds, commercial loan growth is on par with 2001.
One reason why: the prime lending rate dropped from 9 percent at the beginning of January 2001 to 4.75 percent in December. Hershey Federal Credit Union charged 9 percent interest on a five-year home equity loan when 2001 began. By Dec. 17, the rate was down to 5.75 percent.
Lower interest rates brought requests for home equity loans, says Barbara Schwankl, chief executive officer of Lancaster Postal Employees Credit Union, Manheim Township.
New car loans are another matter. “A lot of new vehicles qualified for 0 percent financing, and that’s affecting our new-car portfolio,” Schwankl says.
Banks and credit unions can’t match 0 percent financing, but 0 percent financing often imposes unsympathetic conditions on borrowers, such as a 24-or 36-month payoff, so the credit union is financing some new cars.
“We’re trying to show them that sometimes 0 percent is not best,” says Diana L. Roberts, president and chief executive officer at Hershey Federal Credit Union.
Schwankl says lending was down at Lancaster Postal Employees Credit Union and for credit unions across the country in the first quarter of 2001. Even so, she says, “We have not, thus far, suffered a lot from the recession.”
Sept. 11
All three executives say the Sept. 11 terrorist attacks affected borrowing for a few weeks, but the tragedy has had only a slight impact on their 2001 loan portfolios. “It affected consumer loans for the last half of September rather significantly, and I don’t think that’s quite back to normal, but I’d say it was close,” Ashby says.
“It’s hard to tell that, but I don’t think it had that much effect,” Roberts agrees. “It was slow for two weeks, but after that it was back to normal.”
“The economy has made businesses more cautions about capital spending projects and business purchases,” Ashby says. “Large equipment dealers, their sales haven’t been as vibrant this year. Plants and warehouses have been making fewer additions.”
On the other hand, Ashby has seen the lowest home mortgage rates of his career.
What about this year?
When the Fed cut its interest rate in December, members said that the recession hadn’t run its course. That means that the Open Market Committee likely will lower rates again when it meets Jan. 29 and Jan. 30. Fed members have been hinting that they’ll continue stimulating the economy.
“Looking ahead, we are likely facing a period of quite sluggish economic activity,” Michael Moskow, a member of the Open Market Committee, said in November.
Fed officials have pointed out that unemployment continues to rise, even as the number of layoffs falls slightly, because people can’t find jobs. The unemployment rate climbed to 5.7 percent in November, a six-year high, and it is expected to top out at more than 6 percent early this year.
Richard Margut, assistant eastern regional manager for Northwest Savings Bank, Lebanon, isn’t predicting the end of the recession.
“I’m speaking for myself here, not for the bank, but I don’t see things getting worse. I think the economy has stabilized,” Margut says. “The mortgage rates have picked up.” The bank is now charging one-eighth of a point more than it was in December, which is 6.875 percent on a 15-year loan with no upfront discount points.
He predicts that the number of home-equity second mortgages will fall in 2002. “Everyone who wanted to (refinance their home) already has,” Margut says. “But the rates are still good, so I think people will still be building and buying new homes.”
Ashby agrees, with reservations: “I don’t suspect we’ll see rates this low for a long time, but who knows. Predicting interest rates is a daunting task.”

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