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Fed cuts reserves required at banks

The Federal Reserve Board on Tuesday tried a new tack to boost the economy, announcing it is reducing the amount of money banks must hold in reserve.

By freeing up more money to banks and savings and loans, the Fed's action could lead to another dip in the interest rates they charge on both business and consumer loans.

The Fed said it will cut the required reserves from 12 percent to 10 percent on April 2.

The action is technical, but means that instead of keeping $12 of every $100 in customer deposits in checking accounts at the Fed or in a vault, banks and S&Ls will be required to hold only $10.

That would put an extra $2 out of every $100 in deposits back in the hands of banks, which can invest the money or make it available for loans.

The action could make more than $8-billion available for new loans around the country.

Tampa Bay bankers hailed the Fed's move but likened it to adding more gas to a full tank: It does not mean the car will go any faster.

"Freeing up reserves will make more money available, but it is not like we have been short on money," said George Koehn, chairman and chief executive officer of SunBank of Tampa Bay. "Instead, there's been a shortage of qualified borrowers applying for loans.

"It is another sign of easing by the Fed, though."

At the very least, the Fed said the reduction should strengthen the financial condition of banks and put them in a better position to extend credit.

The Fed also said the action will reduce expenses for banks, and some of the cost savings are expected to be passed on to depositors and borrowers.

"This is good news for depositors, too, because it will hold down the cost of providing checking accounts," said Mark Vitner, an economist with Barnett Banks Inc. in Jacksonville.

The stock market spiked higher at midday after the Fed's announcement, but the gain was short-lived. Bond prices fell sharply, and stocks followed as traders realized the Fed action might be in lieu of another interest rate cut.

The Dow Jones average of 30 industrials fell 21.24 points to close at 3,224.73.

Since the summer of 1990, the Fed has been aggressively driving short-term interest rates down to try and kickstart the economy.

In December, the Fed dropped the discount rate, the rate it charges banks for loans, to a 27-year low of 3.5 percent. The prime rate also fell in response to 6.5 percent, prompting widespread declines in the rates on consumer and business loans.

However, despite government efforts to keep them low, interest rates on bonds and mortgages have begun creeping up in recent weeks.

Rates are up because the market thinks the federal government may be overstimulating the economy, which in turn could increase the risk of inflation, said Barnett's Vitner.

Banks are required by the Fed to maintain a reserve to help the Fed control the supply of money in the economy. The Fed can adjust the level of reserves to ease or tighten the availability of money.

The Fed's move to cut reserve requirements came a day before Fed Chairman Alan Greenspan is scheduled to testify before the House Banking Committee on the central bank's monetary policy and its economic forecast for 1992.

Greenspan has been criticized for the Fed's tight-money policies that preceded the economy's slide into recession in July 1990 and then for failing to ease those policies fast enough as the downturn grew deeper.

Now Greenspan faces the threat that short-term interest rates are under market pressure and could rise further, said bank analyst Charles Peabody of East Shore Partners in Springfield, N.J.

"There is a feeling the Fed has shot its last arrow on the easing front," he said.

_ Information from the Associated Press was used in this report.

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