Rate cut good for Utah

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The Federal Reserve's decision to lower its benchmark interest rate to prevent the country from slipping into recession may provide an additional boost for Utah's economy, which already is among the strongest in the nation.

The half-point reduction in the federal funds rate, which is the interest that banks charge each other for loans, is expected to provide a boost to economic activity nationwide as it lowers borrowing costs for consumers and businesses.

"Where this will help Utah's economy is around the edges," said Sterling Jenson, senior managing director of Wells Fargo Capital Management. "People who have mortgages tied to short-term interest rates should eventually see a reduction in their payments."

Utah's small businesses, whose loans often require that they pay a point or two above the prime interest rate - the lowest rate charged by U.S. banks to their best-rated corporate customers - eventually should see their finances improve as their payments are reset by lenders in response to the Fed's action, he said.

Also, consumers who have home equity loans tied to the prime or some other floating measure may see some interest-rate relief down the road as well, said Jeff Thredgold, economic consultant to Zions Bancorp.

"What this [interest-rate cut] does is give people a psychological boost," he said. "It offers them the sense that the Fed is watching over the economy and is concerned about what is happening."

Although the nation is embroiled in its worst housing slump in more than a decade, Utah's economy has yet to feel much of the impact of the national slowdown in home-price appreciation. The same is true with the record number of defaults in subprime mortgages made to the riskiest borrowers that have worried the financial markets for months.

The Fed's move helps remove for the time being fears that the troubled housing market and widespread credit problems could prompt consumers in Utah and elsewhere to cut back on spending and making investments. Those two scenarios, it has been feared, could throw the U.S. economy into a nosedive.

Now, with the Fed's reassurance, consumers can feel more confident about the future, Jenson said. And that might lead some to spend a little more as they conclude that their individual situations aren't as dire as they might have feared.

For those who want to purchase a home, the new interest rate "opens the door again for many qualified, creditworthy borrowers who may have been shut out over the past month to six weeks as mortgage rates climbed," said Gary Nielson, a vice president with Republic Mortgage Home Loans and president-elect of the Utah Mortgage Lenders Association.

"It is a positive move for those who want to buy a home, refinance or borrow to fix up a property."

On the jobs front, the Fed's reduction probably won't impact Utah much, said Austin Sargent, an economist with the Utah Department of Workforce Services. "Our unemployment rate is so low already that it is hard to imagine it going much lower."

On Tuesday, the Utah Department of Workforce Services reported that the seasonally adjusted unemployment rate in Utah for August was 2.6 percent, down from 2.9 percent in August 2006.

Gary Teran, president of First Western Advisors in Holladay, said like many investors he was expecting the Fed to cut its federal funds rate by a quarter point, or 25 basis points. "It was surprising that they went for a half point. It certainly wasn't something that Alan Greenspan would have done," Teran said, referring to the former Fed chairman.

He noted that the S&P 500, one of the broadest gauges of the stock market, at its peak on July 25 closed at 1,518.90, while on Tuesday it closed at 1,519.78.

"What that means is that everything that was lost as a result of the subprime crisis in August has been recovered. And that is a good message that people should never panic either to the upside or the downside."

steve@sltrib.com