Newport-Mesa to lose interest earnings

Costa Mesa and Newport Beach may lose hundreds of thousands of dollars each as a result of the Federal Reserve’s cutting of interest rates Tuesday, the cities’ treasurers said.

With the United States economy continuing to sag, the Reserve trimmed the federal funds rate — the rate banks charge other banks for overnight loans — by a quarter of a percentage point to 4.25%.

Treasurers Marc Puckett, of Costa Mesa, and Dennis Danner, of Newport Beach, said they weren’t sure how the cut would affect the national economy, but that both cities stood to lose interest earnings on their investment portfolios.

“When interest rates are falling, what we invest in will go down as well,” Danner said.

Neither Danner nor Puckett, however, believed the losses would have a major impact on their cities. Puckett estimated Costa Mesa would lose about $250,000 and the city would absorb it quickly. Danner, who declined to guess an exact dollar amount, said Newport Beach’s loss would be minor as well.

Tuesday marked the third time in three months that the Federal Reserve has trimmed interest rates. The Reserve cut the federal funds rate by half a point Sept. 11 and followed with a quarter-point reduction Oct. 31. The Reserve, in a statement Tuesday, said it had opted to reduce the rate again when previous cuts didn’t net the expected results.

“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” the statement read. “Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.”

The Reserve also cut its discount rate — the interest it charges to banks for direct loans — by a quarter-point to 4.75%. By cutting the rates, the Reserve hoped to fend off the losses caused by the recent subprime mortgage crisis, in which a number of homes have gone into foreclosure and brokerages have laid off employees.

David Alford, the dean of the business school at Vanguard University, said the interest cuts were mostly a symbolic gesture, but a meaningful one.

“I see it as more of a message from the federal government that there is enough concern about the economy that they are willing to take action to make sure we don’t dip into recession,” Alford said. “I see the strength of it being the message that the federal government is paying attention to the problem.”

MICHAEL MILLER may be reached at (714) 966-4617 or at michael.miller@latimes.com.