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Utah banks lost little time Tuesday reacting to the Federal Reserve's half-point hike in short-term interest rates.

Within hours of the announcement, Key Bank of Utah, First Interstate Bank, First Security Bank and others boosted their prime lending rate 50 basis points from 7.25 percent to 7.75 percent, the highest level in three years and the fifth time this year that the Fed has taken action to head off inflation.According to conventional wisdom, the rate hikes are bad news for those who keep a running balance on their credit cards, take out an auto loan, have home equity lines of credit, adjustable rate mortgage loans or need to borrow to keep their business running.

It also should be bad news for Utah's booming housing market as rising mortgage rates cause more people to defer - or not qualify for - buying a home. On the other hand, says Kelly Matthews, chief economist for First Security Bank, the Fed's strong move to quash incipient inflation by raising short-term rates could end up being good news for long-term borrowers, such as those taking out home loans.

"With the bond market rallying as it has, it could end up edging mortgage rates lower, which would obviously be good for our (local) economy," said Matthews. "It's hard to say if auto finance rates would change, and anyone who has a loan tied to the prime rate will see their (payments) go higher, but it's not mandatory that long-term rates will follow."

In fact, following the first three Fed hikes on Feb. 4, March 22 and April 18, long-term rates raced ahead while the stock and bond markets went the other direction. Matthews believes market traders were reacting to the "surprise" of the actions.

But the tightening on May 17 and on Tuesday were greeted more favorably by the "long" markets that were up Tuesday and still rising early Wednesday.

Why are the markets reacting so favorably this time? "I think the Fed thought the stock and bond markets should have reacted the first three times as they have the past two," said Matthews. "I think they (the Fed board of governors) were surprised at how badly the markets took those first quarter-point raises."

Matthews said he initially thought the Fed would raise rates by only one-quarter of a percent this time. "But over the past few weeks, it became clear that a half-point rise would be a better idea." The so-far positive reaction in the markets this week, he said, may be due to a feeling in investors' minds that the worst may be over.

Matthews predicts there will be no more rate hikes until after the midterm elections in November. After that, look for another increase before the end of the year.

He believes the Fed is now fairly close to getting growth below 3 percent, the measure it uses as a yardstick for keeping inflation contained. "There is a notion that 23/4 percent growth is noninflationary. If they can see that happening, they might decide rates don't have to go any higher."

In its statement Tuesday, the Fed said its actions, "Are intended to keep inflationary pressures contained and thereby foster sustainable economic growth. These actions are expected to be sufficient, at least for a time."

The Fed said it was raising, effective immediately, the federal funds rate - the rate banks charge each other for overnight loans - from 4.25 percent to 4.75 percent. The discount rate - the rate at which the Fed lends money to member banks - was increased from 3.5 percent to 4 percent.

The prime rate has traditionally been described as the rate which banks charge their best customers for loans, but Matthews said the prime is now more of a reference rate, one of several, rather than a guaranteed rate of interest for a specific class of borrowers.

Not all economists are as sanguine as Matthews as to the wisdom of the Fed's action on Tuesday. Gordon Richards, economist for the National Association of Manufacturers, termed the rate hike "too much too soon," adding that "fears of inflation seem to be wildly exaggerated."

Richards said there is little evidence that labor costs are rising sharply or that companies are passing along higher costs to consumers.

"The economy was slowing down anyway," he said, "and the growth rate for the third quarter is likely to be 2 percent or less."

Pressure to hold down inflation by raising rates has come primarily from the bond market since inflation erodes the value of any investment that has a fixed rate of return.