Money Still Cheap For Now

July 19, 2002
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GRAND RAPIDS — The good news is the lending rate is cheap.

The bad news is the lending rate is cheap.

The news is good for borrowers, but bad for the economy.

And because the Federal Reserve Open Market Committee decided late last month not to raise the federal funds rate, money remains cheap. Not as cheap as talk, mind you, but at 1.75 percent, money is the cheapest it has been in four decades.

Fifth Third Investment Advisors Chief Fixed Income Officer Mitch Stapley doesn’t think the feds will be in any rush to change the funds rate.

Why?

Consumer confidence has fallen. But if it falls further, double-digit inflation may not be too far behind.

“That translates into slower spending. Then business, which had been beginning to rebound, retrenches,” said Stapley.

“Combined with the overall weakness in the equity market, all of that suggests that we’re looking at cheap money for an extended period of time, as the fed uses the only real tool it’s got at its disposal to get the economy going — and that is low rates.”

For commercial borrowers, of course, the current fed fund rate means lending rates are low, near the levels they were when gas was 30 cents a gallon and ground chuck was 40 cents a pound.

“These are very low, at historically attractive levels, which makes for a very interesting business opportunity. If someone is looking to expand their business right now, they can do it relatively cheaply,” said Stapley.

But for every yin there is a yang, even in finance. Low rates may be good for borrowers, but these are also the sign of a scrawny economy.

“The reason why the rates are low is the economy has been weak. The fed, doing its job, lowered rates aggressively to help try to stimulate demand in the economy at the consumer level and the business level,” said Stapley.

“You’ve got to be confident enough in your business and your business prospects, and have a solid enough business plan that you can go to the bank.

“While the rates are attractive, there is going to be some concern coming from lenders and you really have to talk to them about extending credit during the turmoil that we have.”

Stapley added that if a business was on solid financial ground with a good prospect, a bank would be likely to lend and at a low rate.

At its June meeting, the Open Market Committee reported that it saw some growth in productivity and that economic activity was increasing, so it felt there would be little good that would come from raising the fed fund.

But the committee took that stance before the news broke that the federal government’s deficit would reach $160 billion this fiscal year, and that deficit could eventually impact the cost of money.

“There is going to be an increased issuance of debt from the Treasury Department to finance that. That could put upward pressure on interest rates just from a demand for capital. It’s more borrowers coming into the market, irrespective of where they come from,” said Stapley.

Fixed-income investors could get concerned about the debt that is coming from higher federal spending, which could lead to inflation and higher interest rates down the road. But for now, Stapley felt there was enough demand from investors to pick up the debt while the equity market is so volatile.

“But how long this lasts, who knows? Everyone’s crystal ball right now is getting kind of murky,” he said.

“The good news is rates are low.

“The bad news is rates are low because the economy has been weak — and that makes it a tough business environment.”

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