Loan Rates Drop; Jobless Rate Jumps

Posted: February 02, 1991

The Federal Reserve Board moved quickly yesterday to lower interest rates, less than an hour after the U.S. Labor Department reported the highest unemployment rate in 3 1/2 years.

The report, showing a loss of 232,000 jobs in January, was much worse than expected. Almost immediately, the Fed cut the discount rate to 6 percent from 6.5 percent. The discount rate is what banks pay to borrow from the Fed.

Minutes later, a number of big commercial banks dropped their prime lending rates to 9 percent from 9.5 percent. Because most business loans and many consumer loans are tied to the prime rate, the drop immediately lowers interest costs on existing loans for such borrowers.

Within hours, more than a dozen corporations had seized the chance to borrow at lower rates, issuing billions of dollars in new bonds.

The Fed's aim in lowering interest rates was to spur just such activity. If lower interest rates entice more borrowing, and more spending by companies and consumers, all that would stimulate economic activity.

Yesterday's cut in rates was the second in about six weeks. The Fed dropped the discount rate a half-percentage point on Dec. 18 to 6.5 percent, and banks lowered the prime lending rate by the same amount on Jan. 2 to 9.5 percent.

Nationally, the Labor Department said, unemployment rose by 0.1 percentage point in January, to 6.2 percent of the labor force, its highest rate since June 1987.

But the real shocker was the drop of 232,000 in the number of workers on nonfarm payrolls during January. Most economists had predicted a drop of 75,000 or fewer.

The decline left 116.9 million Americans with jobs last month. The jobless numbered 7.7 million, up from the 7.6 million unemployed in December.

Another downer was a report by the National Association of Purchasing Management, whose index of industrial activity fell to 37.7 percent in January

from 40.5 percent in December. A number below 44 percent indicates a weakening economy.

The discouraging numbers appeared to wipe out the faint hope that the economy might be turning around, raised two days ago when the Commerce Department said the Index of Leading Economic Indicators had risen by 0.1 percent in December, its first gain in six months. The index is designed to predict economic activity for six to nine months.

"Today's dismal unemployment report . . . should eliminate any illusions that this recession is just a temporary nuisance," said Lawrence A. Hunter, an economist with the U.S. Chamber of Commerce.

Fed chairman Alan Greenspan had signaled the drop in rates on Thursday, when he warned that a long war in the Persian Gulf could lengthen and deepen the recession.

In Pennsylvania and New Jersey, jobless rates shot to a level above the national unemployment rate. That is unusual; unemployment in both states has in recent years run below the national rate.

Pennsylvania's January unemployment rate was 6.3 percent, up from 5.7 percent in December. In New Jersey, unemployment rose to 6.4 percent, also up

from 5.7 percent in December. Total employment dropped in both states. Pennsylvania's civilian employment dropped by 103,000 to 5.48 million. In New Jersey, employment fell 61,000 to 3.78 million.

The government counts as unemployed only those actively seeking work, so many job losers do not show up in the unemployment rolls because they do not try to find new jobs.

Some had expected the bad news. The only surprise in the decline in Pennsylvania and New Jersey employment was "that it didn't happen earlier," said Paul Getman, an economist with Regional Financial Associates, an economic consulting firm in West Chester.

"The entire Northeast is mired in a construction depression the likes of which it's never seen," he said.

Some companies responded quickly to the Fed's cut in the discount rate and its simultaneous effort to push down the federal funds rate to about 6.25 percent.

While the discount rate is symbolically important as an indicator of Fed intentions, the federal funds rate is actually used in many more business transactions. It is the rate commercial banks charge each other on short-term loans.

Within half an hour of the discount-rate cut, Morgan Guaranty Trust, of New York, and First National Bank, of Chicago, dropped their prime rates to 9 percent. Citibank and BankAmerica lowered their primes to 9 percent within hours, as did First Fidelity Bancorp., of Lawrenceville, N.J. First Fidelity is the parent of Philadelphia's Fidelity Bank and New Jersey's First Fidelity banks.

"I think the quickness of banks to lower the prime suggests they are indeed ready to start lending again," said Cynthia M. Latta, senior economist at DRI/McGraw-Hill Inc. in Lexington, Mass.

Corporations immediately took advantage of the lower rates to go on a borrowing spree, with 16 companies rushing to sell about $2.6 billion of bonds.

However, some economists expect the Fed will have to push rates even lower to lift the economic malaise.

"The Fed's action will make a difference," said Latta. "But I don't think the rates are through falling. I think the Fed is panicked."

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