BANKERS SAY CUTS GOOD FOR ECONOMY

The lowering of interest rates Thursday by the Federal Reserve is good news but on its own is unlikely to have a significant impact, according to some financially minded people in the region.

In an attempt to head off a possible recession, the Fed lowered the rate banks charge each other for overnight loans from 6 percent to 5.75 percent. The reduction is likely to lead to lower bank prime rates that are benchmarks for loans to consumers and businesses.

"A quarter of a point is a very small move; they went down only slightly in the rate," said Charles Daniel, president of Capital Bank in Cape Girardeau. "A half-point would have been a more sizable move."

During a one-year time period ending Feb. 1, the Fed raised rates seven times, doubling them from 3 percent to 6 percent, in an effort to slow down the economy and avoid inflation. Federal Reserve Chairman Alan Greenspan said in a statement Thursday that inflationary pressures have since receded.

Percy Houston, president of South East Missouri Bank in Cape Girardeau, said the Fed had perhaps gone too far in raising rates and its latest decision was a bit of fine-tuning.

"I think it's good for the economy overall," Houston said. "Anytime interest goes down it's a plus for the business community. They probably made about the right adjustment."

The Fed's decision came after two days of closed-door meetings and followed just hours after the latest government economic report signaled a possible recession. The Index of Leading Economic Indicators dropped 0.2 percent in May, the fourth decline in as many months. Often, three or more consecutive declines signal an impending recession.

Five of the 11 components of the index contributed to the slide. The biggest contributor was an increase in weekly first-time claims for unemployment benefits, a sign of a deteriorating labor market. Jobless claims rose 8 percent in May, the biggest increase in nearly 18 months.

Houston said lower rates will prove a boon to borrowers.

"From a banker's standpoint, it will obviously help customers obtain credit, and that's good," Houston said.

But Daniel pointed out that not everyone is a borrower.

"Well, if you borrow money it's good," Daniel said. "If you are a person with money to invest you might see the rate go down and not be as happy."

A second key interest rate, the discount rate, was left untouched at 5.25. percent. That is the rate at which the Fed loans directly to banks.

Donna J. Domian, an investment representative with Edward D. Jones and Co. in Cape Girardeau, said the Fed's announcement made investors on the stock market happy. The market topped 4,600 for the first time Wednesday and went even higher following the announcement.

"This led the stock market to rise today and, of course, as a broker you're happy to see the market again hit an all-time high," Domian said.

"There is an impression, and this impression is correct, that high rates lead to recession," Domian said. "To nip that in the bud, the Fed decreased rates modestly."

The market has been performing well this year after a somewhat lackluster 1994, Domian said, adding that investors are focusing more on corporations and stocks and not just on interest-bearing investments. It is a strategy she recommends.

As to whether the Fed's action is indicative of a developing trend, it is difficult to say.

"It's darn near impossible to call interest rates in the short term, but in the long term I think they'll tend downwards," Domian said.

Daniel said the reduction was a political move driven by the continuing call for lower rates. That could lead to further reductions if the political winds continue blowing in that direction.

"It indicates to me that a lot of political pressure has been put forth in support of lower rates and this is an accommodation of those political pressures," Daniel said.

The economy, after expanding a robust 4.1 percent last year for its best showing in a decade, slowed to a 2.7 percent annual rate in the first three months this year. The figures are not in for the just-ended second quarter, but analysts believe growth will be near zero.

Some information for this story was provided by The Associated Press.