Interest Rates: More Snip Than Cut

Because banks were already discounting loans, entrepreneurs don't see the Fed's rate reduction having much impact

The Fed's surprise rate cut may have done less to loosen the money squeeze than many companies might like. In the last three quarters of 2000, the spread between the prime rate and the rate that companies are paying for their financing shrank. It was down to 0.35% in the last quarter, compared with 0.57% a year ago, according to a survey of 425 CEOs of fast-growing companies by PricewaterhouseCoopers.

"The banks have apparently been discounting a bit in a competitive loan market as the prime escalated to its latest highs. But now, with a [half-point] drop in the prime, half of the Fed's new rate cut will go back to the banks when they return to their old pricing structure," says Tracy Lefteroff, who studies global private equity for PricewaterhouseCoopers.


  In the last quarter, 25% of companies surveyed completed new bank loans, paying 9.85% on average, vs. 8.57% a year ago. Some 26% of the CEOs taking part in the latest survey were concerned that lack of capital for expansion would limit growth in 2001 -- up from the 20% who expressed that fear a year ago.

The results suggest that despite Fed Chairman Alan Greenspan's dramatic move, borrowers aren't likely to get much of a break just yet.

By Theresa Forsman in New York

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