THE BASIS POINT

The Rate Picture For 2005

 

By the time you read this, Wall Street economists will have offered 2005 market outlooks ranging from doom to boom. If you’re a home buyer or owner, it can be difficult to discern the interest rate picture from all this noise. So we thought we’d simplify things for you. Not only to give you a feel for rates in 2005, but also to give you a basis for interpreting rate news on your own.

First, note that when you hear of Fed rate hikes, it’s referencing the Fed Funds Rate, an overnight bank-to-bank lending rate. This rate, currently at 2.25%, is not a rate we as consumers will ever get for things we finance. It’s just a benchmark for the broader rate complex. With a few exceptions aside like HELOCs, most mortgage rates are based on mortgage bond yields.

In June 2004, the Fed Funds Rate was at an all-time low of 1% because the Fed needed to spur spending with cheap money when the economy was hurting. Their goal now is to keep prices in the economy from rising too fast and prevent inflation. The next Fed rate-setting meeting is February 1, when another .25% hike is likely. Estimates call for a 3.5% Fed Funds Rate by the end of 2005. This according to median estimates from 61 prominent Wall Street economists tracked by Bloomberg. This is good news for mortgage rates because it’s not the spike many believed was coming.

 

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