Advertisement
  1. Archive

Bay area businesses unfazed by prospects of Fed action

Carolyn Hashem, a St. Petersburg Realtor, doesn't expect the phone to be ringing off the hook today with clients speeding up their home-buying decisions.

And Jerry Ulm, a Tampa auto dealer, also foresees a normal day, even though the Federal Reserve is expected to raise interest rates today for the first time in two years.

Business people whose livelihoods are tied to the cost of borrowing money don't seemed fazed by the expected increase of a quarter percentage point in interest rates. Realtors, car dealers and stockbrokers say consumers won't change their buying habits if the increase is a onetime occurrence.

Sure, consumers will have to pay more for short-term loans _ everything from auto loans to credit cards to adjustable-rate mortgages _ but the increase will be so minimal that most won't notice. However, if more interest rates spikes are expected during the year, then consumers could curtail spending.

"Seeing the rates go up a quarter or a half a point is not going to have a significant negative impact," said Ulm, who owns a Dodge dealership. "A couple of years ago when the Fed was raising rates consistently, it did have a noticeable effect on business."

He's referring to the 12-month period between February 1994 and February 1995 when the nation's central bank raised rates seven times. So it's easy to understand why consumers might overreact to a potential move by the Fed. Recent history says when the central bank takes action to slow inflation, it's like trying to stop an onrushing train.

"If it's anticipated that there will be future increases, it may make some people jump on the bandwagon quicker," said Hashem, owner of Hashem Realty, a franchise of Coldwell Banker.

A short-term flurry of buyers would be good for her business, but any long-term rise in interest rates would dampen her spirits. The same holds for Ulm, who says it's easier to manage his cost of doing business when rates are stable.

He normally keeps $7-million to $8-million worth of inventory, which is on loan from a distributor. When interest rates go up, his borrowing costs go up as well as consumers'.

"I've enjoyed these last two years," Ulm said. "We haven't had the peaks and valleys that I'm used to seeing."

Economists are expecting the federal funds rate, the rate charged among banks on overnight loans, to rise to 5.5 percent from 5.25 percent. In response, lenders are expected to boost the prime rate, the basis for most consumer loans, from 8.25 percent to 8.5 percent.

Because Fed Chairman Alan Greenspan has been strongly hinting at an increase, a quarter-point uptick has already been factored into the stock and bond markets, said Alen R. Smith of Allen C. Ewing & Co., an investment bank in Tampa.

"The worst thing that could happen is if the Fed doesn't raise them," Smith said. "It would send a signal that it is not worried about the inflation lion."

That would be a dramatic reversal of policy for the Fed and could send the stock market tumbling, he said.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement