May 21, 1994

Firms fret about the Fed

Local view: Rate boosts can slow, not stop, recovery

 

By Peter Fabris

Sentinel Staff

 

Federal Reserve Chairman Alan Greenspan thinks the economy needs some cooling off. Business people in the Monadnock Region don’t completely agree, but they’re not panicking over government-induced increases in interest rates.

 

Most local firms have just begun to see an improvement from the recessionary days of the late 1980s and early 1990s. They would have preferred to see the local economy catch fire before the Fed poured cold water on it Tuesday by raising interest rates again. But, considering that the rates had been remarkably low, modest increases shouldn’t strangle the recovery, area business leaders said this week. Sales have increased at Kingsbury Corp. in Keene, but “business is certainly not booming,” said John Cookson, the company’s vice president of finance.

 

Kingsbury supplies large assembly machines for many industries, including home appliances, cars and trucks. Typically, consumers buy products from those industries on credit. If consumers cut back on those purchases because of interest rates going up, Kingsbury customers are likely to cut back on their orders.

 

So, what would Cookson say to Greenspan if they met? “I’d like to tell him to hold up,” he said before Tuesday’s rate announcement. “I think any more moves to raise interest rates would be premature. But, I’m not an economist; I don’t see all the figures, just the ones in our business.”

 

The Fed increased two key interest rates this week by one-half percent, sending a dramatic signal it was determined to stem any inflationary spiral. Both actions were departures from the smaller quarter-point rate increases the Fed ordered earlier this year, and are expected to drive up borrowing costs for everything from home mortgages and auto loans to short-termbusiness loans.

 

When the Fed raises rates, the nation’s commercial banks quickly follow suit. That creates a ripple effect throughout the economy, as businesses and consumers have to pay more for everything bought on credit. Greenspan and other Fed officials have insisted they are not trying to choke off the economic expansion, but are merely pushing interest rates to a “neutral” level, where they are neither spurring growth nor retarding it.

 

“The moves (in interest rates) of this magnitude probably doesn’t greatly affect the ability of local businesses to borrow,” said Peter Baxter, chief executive of Keene-based CFX Financial Corp., holding company for CFX bank and CFX Mortgage. But, he added, "they put some sort of damper on the economy.”

 

Although the Monadnock Region’s economy hasn’t rebounded as strongly as that in central and southeastern New Hampshire, neither does it have as far to bounce back, Baxter said. “We never sunk to the depths that the central part of New Hampshire did," he said.

 

Among the region's economic segments, home sales may be the most sensitive to the Fed's moves this week. Even modest increases in interest rates can price some people out of the home market, and force others to buy less expensive homes than they had hoped. The upside is that housing prices are still low compared to the rnid-to-late 1980s, said Paul Pouliot, president of CFX Mortgage Co.; the relatively low prices are still an inducement for people to buy. The mortgage business has fallen off significantly from just a year ago, but that's not due to rising interest rates, Pouliot said; most of the drop has been in the refinancing market, where demand has slacked off drastically. Borrowing for new homes is actually on the rise, he said. Contractors are building housing developments again, after several years of virtually no activity, he said.

 

Businesses in New Hampshire, where the recovery hasn't been as strong as in the South and Midwest, may be more vulnerable to rising interest rates. Pouliot is concerned that the increases could stifle demand in the Granite State's "still-fragile” economy. But car dealers aren't worried, said Daniel McLeod, president of the N.H. Automobile Dealers Association. "I think it isn't going to have a significant impact on sales," McLeod said of the rate rise. "I don't think we're going to press the panic button."

 

Interest rates are still relatively low, he said. In the late 1970s and early 1980s, interest rates on new car purchases were 18 to 19 percent, a far cry from the 7 to 8 percent common today. A modest increase in interest rates won't discourage consumers from buying new cars if they need them, he said. Since last fall, auto dealers in most areas of the state, including the Monadnock Region, have seen sales pick up. Before this year's increases, interest rates were "about the lowest I've seen them in the 15 years I've been in the business," said Paul Blanchette, general sales manager at Keene Chrysler Plymouth Inc. "Rates are starting to come back to where they were in 1987 and '88, when things were going gangbusters."

 

Consumers can still get some good loan deals from manufacturers. Chrysler offers interest rates as low as 2.9 percent on certain models, Blanchette said. Of course, rates for the most popular models are much higher. Many cars bought during the boom years are breaking down now, and consumers need to replace them. So, car dealers are upbeat about sales this year. Dealers that borrow to buy their inventory could have their profit margins squeezed a bit from the higher rates. But most New Hampshire dealers expect sales this year to more than make up for that.