Fed Holding Line on Rates; No Move Seen Till Next Year

Banks will get to enjoy this year's stable interest rate environment a while longer after the Federal Reserve's decision on Wednesday to again leave its monetary policy unchanged.

With inflation quiet and the nation's economy seemingly on cruise control, the central bank has found little need for intervention since early 1995 - and it may not intervene until next year, according to observers.

The long span of rate equilibrium over the past two years has been a nearly ideal business environment for banks of all sizes.

"It's been helpful. It allows more stable pricing of loans, and a more stable environment for pricing deposits," said Steven R. Bluhm, senior vice president for funds management at Banc One Corp.

Since interest rate risk is based on changes in rates, the usual hazards of banking have also not loomed quite as large recently. "Our risk profile goes down," noted Mr. Bluhm.

At the heart of things, bank customers - corporate and retail - are much happier when rates are largely predictable.

"Generally, the capital markets have been friendly to a lot of our corporate clientele across a lot of different industries, including the middle market," said Robert Mueller, chief credit policy officer at Bank of New York.

"Banc One has a very large consumer clientele," noted Mr. Bluhm. "Consumers and our customer base prefer stable pricing. They prefer knowing a loan rate will stay pretty much the same. That is important to our business."

One economist thinks the benign rate scenario may continue well into next year. Gary L. Ciminero of Independent Economic Advisory, Providence, R.I., thinks a Fed rate increase next month is unlikely.

"Short-term rates should stay relatively steady until the Fed loosens credit around the middle of next year," he predicted. While longer-term rates could rise some in the interim, he expects the government's 30-year bond rate to return to the 6% level by the end of next year.

Mr. Ciminero said Wednesday he did not know of a similar recent period of quiet rates at this point in a business cycle. The current economic expansion is in its sixth year. "The reason is inflation, which has moved very little," he said.

For banks, the picture is bright, he noted, but the deterioration in consumer credit is a potential near-term negative. Also, banks can expect to compete more for business next year as loan growth slows to mid-single digits and margins narrow.

Mr. Mueller of Bank of New York also struck a cautionary note, pointing out that a period of stable rates can prompt some borrowers to downplay risks.

"We have to be very careful that our planning contends with the possibility of higher rates," he said. "People tend to forget what can happen."

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