Fed deals another rate hike

As with the 12 that came before it since June 2004, the impact of Tuesday's 13th hike in the federal funds rate - which banks charge each other for overnight loans - was difficult to gauge, local experts said.

"I don't think we've really seen the full effects of the increases over the past year, because some things just don't change immediately," said Stephen G. Hoffmann, president and CEO of Palm Springs-based Canyon National Bank.

Local observers do agree on a number of likely cumulative impacts from the Federal Reserve's increases. The latest hike takes the funds rate from 4 to 4.25 percent, the highest level in 41/2 Fed signaled that the campaign to raise interest rates to fight inflation was likely drawing to an end.

Lending tied to the prime rate, such as credit card debt, will likely be the first to rise, following patterns from previous Fed hikes. Hoffmann noted that business lines of credit - which are short-term and pegged to the prime rate - could also be impacted.

"You have lines of credit that may have cost 5 percent a year and a half ago, and they could be going to 8 percent now," Hoffmann said Tuesday. That could eventually prompt, for example, companies nationwide to reconsider staffing needs or future building projects.

Hoffmann emphasized, however, that valley growth is currently keeping construction and other existing business sectors going strong.

Another expected impact will be on those holding adjustable-rate home loans - whether in conventional loan packages or the increasingly common "exotic" loans that have emerged over the past two years. Those newer type loans, offered and heavily advertised by various lending companies, carry features like 40-year terms and temporary introductory rates as low as 1 percent.

Traditional local institutions like Pacific Western Bank do not generally offer the exotic packages. But Pacific Western president and CEO William Powers, said the impact of those loans could arrive in late 2006, as borrowers see their teaser rates come to an end and higher adjustable rates kick in.

"Say you had somebody who took the savings from the introductory rate and bought a BMW," said Powers. "When that introductory rate ends, he's got the higher rate on the home loan, plus he's got to pay for that BMW."