Alan Greenspan and Your Wallet

GREG WEAVER isn't an economist - but he's been closely following the recent actions of the US Federal Reserve.

The San Diego defense contractor is about to purchase a new home, and he consciously delayed locking in a mortgage rate before the Fed met last week. The reason: He figured that Fed officials would trim short-term interest rates to maintain economic growth and that his own rate would be lower if he waited.

His prediction was right on the money. After the US central bank lowered its key federal funds one-quarter of a point last Thursday, Mr. Weaver's prospective mortgage rate went down one-eighth. That will cut $50 from his monthly payment - and he figures it might drop further still. "That's at least $600 a year saved," he says. "I can find better things to spend that on."

An example of Washington savvy from someone whose job depends on Uncle Sam? Partly. But Weaver's tale may be part of a larger story: in recent years, an explosion in variable-rate financing has made American consumers extraordinarily sensitive to the results of federal interest rate actions.

Thus the Fed's decision last week to lower rates slightly could eventually ripple into the budgets of millions of households across the country. Though the rate cut was a mere sliver, it's the direction of the rate reduction, not the amount that is important.

The move shows Fed officials are committed to boosting the economy - and wide rate swings have taught many noneconomists that once the Fed starts pushing rates up or down, the trend can continue for some time. The cut, for instance, was the first since September 1992. The Fed has raised rates consistently since February 1994.

"People are now very acutely aware of interest rates and how interest rates affect their pocketbook," says Keith Gumbinger, an analyst an HSH Associates, a New Jersey financial-research firm.

The old 30-year fixed mortgage, for instance, is no longer the norm. More than half the mortgage loans now outstanding in the US are variable rate instruments, according to government statistics.

The now-popular home equity loan is also usually a variable rate instrument. And about 3 out of 4 credit cards now charge consumers variable rates on outstanding balances, notes Robert McKinley, president of RAM Research Corporation, a credit research firm in Frederick, Md.

When interest rates rose last year, consumer spending "dampened," Mr. McKinley says. Last week's short-term rate reduction by the Fed won't show up in credit card bills until October, he adds. Some further rate cuts "might put consumers in a better mood to use their cards during the coming Christmas shopping season," he says.

But McKinley has put his finger on the big question about the recent Fed action. Will it be a blip, a one-time reduction taken by Fed officials still determined to keep interest rates up to fight inflation? Or will further signs of weakening in the economy convince the Fed that more rate reductions are necessary, spreading easier credit throughout the country and prompting more consumer spending and business activity, to ward off recession?

THERE'S little question that the nation turned an important corner in the business cycle last week when the Fed lowered from 6 to 5.75 percent its key Federal funds rate - the amount banks charge each other for overnight loans.

From mid-1990 until September '92, Fed officials had steadily cut rates as means of fighting the early-'90s recession. Then from February 1994 through February 1995, the Fed slowly raised rates, trying to cool what it saw as an overheated US economy.

Will the Fed continue to ease rates? Some economists think so. Robert Dederick, a consultant with Northern Trust Company in Chicago, predicts the Fed will lower rates one more time in August as "an insurance policy." Donald Straszheim, chief economist at Merrill Lynch & Company believes the Fed may have to ease more during the fall if US growth remains sufficiently subdued.

On the other hand, Lyle Gramley, a former Fed governor who is now an economist at the Mortgage Bankers Association, believes the Fed's next move will be to tighten rates. He points to one sign that that economy isn't falling into recession - on Friday, the government reported the June unemployment rate had fallen to 5.6 percent from 5.7 percent in May.

"We will see further strengthening in the housing and industrial sector over the next one to two months," predicts Mr. Gramley. By August, he says it will be clear to the Fed that no more easing is necessary.

Taking a middle course, economist Veronika White of First Fidelity Bancorporation in Philadelphia, predicts the Fed will "sit tight" the rest of the summer to evaluate the economic data.

The key to renewed economic growth, she believes, will be the consumer. She is optimistic the consumer will return, even if modestly. "Americans are still shopping; they have not abandoned the malls," she says.

On one level, the rate cut will pump money into the economy, saving about $450 million on the nation's $292 billion credit-card debt, for instance. But at the pocketbook level that big sum may translate into only modest relief for individual consumers. On a typical 48-month auto loan of $12,000, the savings will be only $1.35 per month if the interest rate declines to 7.75 percent.

"The truth of the matter is that does not amount to a lot on a monthly payment, or even over the life of the loan," says Scott Ross, a vice president at AAA AutoEase, a program offered by the Automobile Association of America to their members.

The rate reduction is only slightly more significant on a mortgage. On a $100,000 adjustable rate loan, the interest payment is likely to drop by about $7 per month. On a fixed rate mortgage, the reduction is likely to be slightly more. Of course mortgage rates have already dropped substantially this year, falling from 9.25 percent to about 7.50 percent today. "We don't expect a lot more improvement in mortgage rates," says David Seiders, chief economist for the National Association of Home Builders (NAHB) in Washington.

With mortgage rates at current levels, NAHB expects the housing industry to have a reasonable year with housing starts off about 11 percent from last year. "In cyclical terms it's not that bad," Mr. Seiders says.

The reduction in rates will also provide only modest relief for people using credit cards. On an adjustable credit card, the interest rate will decline from 18.31 APR (annual percentage rate) to 18.16 APR. For the average credit-card-holding household, this breaks down to a savings of about $5 per month on a balance of $3,100. A 1/4 of a percent reduction in rates will have "minimal impact," says RAM Research's Robert McKinley. "It's not enough to get the fireworks back out, but is significant," Mr. McKinley says.

Of course, there's a consumer downside to lower interest rates as well. Unfortunately for savers, the returns on certificates of deposit (CD) will shrink. "One man's saving is another man's loss," Mr. Dederick says.