Interest rate at lowest point in 40 years

Published 12:00 am Wednesday, October 3, 2001

Staff Writer

A cut made by the Federal Reserve on Tuesday has put interest rates at the lowest point in almost 40 years.

Faced with an already declining economy that took an even harder hit with terrorist attacks on the United States, the Federal Reserve made its ninth cut this year. The half point cut is the lowest since 1962 and is to prevent further weakening of the economy by getting people to spend and invest.

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Federal Reserve Chairman Alan Greenspan announced Tuesday the 2.50 percent cut for the federal fund rates, which is the interest banks charge each other on overnight loans, is the lowest recorded since May 1962.

"Lower interest rates are, typically, taken to stimulate activity," said Larry Lovik, Adams-Bibb chairman of Free Enterprise at Troy State University.

"I think the cuts were the right thing, but we’ll have to see consumer confidence improve."

The Federal Reserve has also cut its discount rate ­ the interest it charges to make direct loans to banks ­ by a half point to 2 percent, matching the level in Nov. 6, 1958.

As measured by the gross domestic product, the economy saw almost no growth in the second quarter. Expanding at only a rate of 0.3 percent made this the weakest time in more than eight years and many analysts are predicting the second quarter will be the last of economic growth this year.

The Blue Chip Economic Indicators consensus is expecting the gross domestic product to reduce by another 0.5 percent in the July-September quarter and by 0.7 percent as the year closes.

That means a recession, which is defined as two consecutive quarters of decline in the gross domestic product. The last recession was in 1990-91.

An already sluggish economy was made worse by the Sept. 11 attacks on the United States.

Lovik said those terrorist attacks created "psychological terror" in the mood of consumers.

"Hopefully, Americans will not panic," Lovik said. "If people panic, this could really almost bring the economy to a standstill. It’s my hope the American mindset will show a lot of resolve."

But, Lovik is confident the economy will be "resilient" and expects to see some pickup by 2002.

"Consumers will tend to borrow when they’re more optimistic," Lovik said. "The American economy is the strongest in the world. Our future will be what we choose it to be."

He and Terry Mobley of Troy Bank & Trust Primevest Financial Services both acknowledge the uncertainty in the minds of investors.

"Right now, there’s not a lot of confidence out there," Mobley said. "Everybody’s still gun shy. Lower interest rates will definitely help. If you put a couple hundred dollars back in people’s pockets each month, they’ll spend it."

As far of the stock market is concerned, Mobley described it as "hanging on every piece of bad news."

Like Lovik, Mobley expects "we will bounce back," but admits it will take some time "for things to catch."

The main thing Mobley expects to see is refinancing of home mortgages. He said it has already been predicted refinancing will add up to $1 trillion next year.

Mary Shirley, president of the Pike County Board of Realtors, said the interest rates are ideal for buying a home.

The interest rate on a 3-year mortgage is 6.5 percent and at 6 percent for a 15-year mortgage.

"Those are excellent rates," Shirley said. "We don’t know how long this is going to last, so people don’t need to wait."

Heading into the holiday season should have a positive impact with low interest rates.

"We’ve got some catalysts," Mobley said. "I think everything is being done that can be done."