WASHINGTON -- Democratic distress over rising interest rates boiled over at a House subcommittee hearing Thursday as liberals accused banks and the Federal Reserve of thwarting both the recovery and the aspirations of middle-class America.

"Your rate hikes mean hundreds of dollars more a month on mortgage payments," said Rep. Nydia M. Velazquez, D-N.Y. "For many, that is the difference in whether they can afford to own a home."

"Banks have been swift to raise loan rates, but slow to raise rates on deposits accounts," she added. "Consumers are not getting a fair rate on money market accounts."

Rep. Joseph Kennedy 2d, D-Mass., chairman of the House Banking subcommittee on consumer credit and insurance, told Federal Reserve Board Governor Larry Lindsey that he doesn't "understand the struggle of working people."

'Stiffling the Recovery'

"I don't understand why, with 2% inflation, you need to raise rates," Mr. Kennedy asked. "There is no threat of inflation, and you are stifling the recovery."

Mr. Lindsey argued that with inflation running at 2.75%, the 4.25% federal funds rate represents a real interest rate of only 1.5%.

"By historical measures, rates are not at a real high level," he said.

Despite the frustrations evident at Thursday's hearing, most observers believe Democrats are unlikely to pursue legislation aimed either at curbing the Fed's authority or at lowering consumer rates.

However, that doesn't mean the hearings are without risk, said Edward L. Yingling, chief lobbyist for the American Bankers Association.

"It's a public relations problems for banks," he said.

The commercial banking industry was not represented at Thursday's hearing. But the ABA has been invited to testify June 22, when the panel holds a second hearing focusing on bank fees, Mr. Yingling said.

Some Homeowners Hurt

The Mortgage Bankers Association of America warned the panel that rising rates already have hurt homeowners.

"If mortgage rates stay at their relatively high levels, consumer mortgage debt payments will rise this year, inhibiting general consumption spending for the economy," said David Lereah, the trade group's chief economist.

Rates also affect housing affordability, Mr. Lereah said.

"Monthly mortgage payments increase by $74 and yearly mortgage costs increase by $888," he said. "Further, first-time homebuyers would need an additional $3,552 in income to qualify for a mortgage loan."

All told, as many as 200,000 renters will be kept from purchasing a home this year solely because of higher rates, Lereah said.

However, the Fed's Mr. Lindsey argued that rates for many types of credit are low.

"Auto loan rates at banks averaged about 11% in 1991, but had dropped to 7.5% on average by the first quarter of this year," he said. "Our series on credit card rates, which typically has shown very little movement, dropped two percentage points from its recent high in early 1991."

The Fed governor acknowledged that retail certificates of deposit rates have been lower than might be expected, possibly because banks didn't have enough loan demand to justify increasing deposits.

"In recent months, though, loan demand has firmed and rates on retail CDs have been rising steadily as banks have needed to raise funds," he added.

The ABA, though not invited to testify, distributed documents arguing that credit markets are sufficiently competitive, and that consumers can shift into different investments if they are unhappy with bank rates.

"Our basic point is that rates are competitive and there is plenty of disclosure," said Mr. Yingling.

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