Fixed and ARM rates rose .5% two weeks ago, dropped .5% last week, then rose about .25% today following an ISM Index number that showed February manufacturing activity better than expected. Rates also moved up on public comments from Philadelphia Fed President Charles Plosser, a voting member of the rate-setting Federal Open Market Committee. He said Fed rates should be higher to avoid inflation. Actually he didn’t say that. But that’s what markets interpreted and rates shot up. What he actually said was that current financial market turmoil has caused the Fed to lower rates, and that these Fed policy “deviations should be temporary and limited and promptly reversed when conditions return to normal.”
The most important thing here is that rates are low and we can’t necessarily expect them to be low for the rest of the year. Rates too low for too long is what caused many to blame Greenspan for the market troubles we have now.
Tuesday three more voting members of the FOMC will create more waves—Fed Chairman Ben Bernanke, Dallas Fed president Richard Fisher, and Fed Governor Frederic Mishkin are all making public comments. Two weeks ago, Fisher and Mishkin caused rate spikes with inflation bias comments. Friday is the all-important Consumer Price Index inflation report, and the monthly jobs and wage growth report. If these come in higher than expected following all the Fed speak, rates will jump.
MORE DETAILS ON FED SPEAK
Fed Chairman Ben Bernanke has been saying what Plosser said for months: rate cuts are to help financial market liquidity. He’s wisely left out the part that that they’d hike rates back up to avoid excessive growth in prices. Perhaps because he knows this is implied by markets anyway, and it’s a mistake for Bernanke to let his lieutenants speak publicly and beat markets over the head with it.
Greenspan’s public comments were notoriously obtuse, his FOMC members rarely made public comments, and he ruled the FOMC with an iron fist—his decisions went. Bernanke is much more clear in public comments, his FOMC members constantly make speak public comments, and he encourages consensus in FOMC decisions. I think Bernanke’s approach is better in all areas except for allowing high public visibility for voting Committee members. If they continue to let their consensus building debates play out publicly, the volatility will get worse. It’s too much information for sensitive markets to digest. The Fed’s job is to steady the ship, not create more waves.
Rates are very good right now, and anyone buying a home is benefiting from this. If it gets better, consumers and businesses will benefit. But as long as the Fed is so outspoken, people should let it sink in. Same theory goes for super-conforming loans (up to $729k in much of the Bay Area). Higher limits may help some, but pricing can’t be counted on because of the market itself rising, and super-conforming from $417-729k) will most likely carry higher rates than conforming loans up to $417k.
Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.125% (6.275% APR)
15 Year: 5.375% (5.53% APR)
5/1 ARM: 5.375% (5.52% APR)
Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 7.0% (7.14% APR)
5/1 ARM: 6.125% (6.28% APR)
7/1 ARM: 6.125% (6.28% APR)