A Wintry Summer For The Economy

The economy was growing steadily earlier in 2004 , but cooled off significantly this summer. Nevertheless, the Fed continues to wean us from overly-cheap money. They’ve raised the benchmark Fed Funds Rate by a half-point to 1.5% since June 30. Interestingly though, mortgage rates have held close to their lows. This month, I wanted to show you why by reviewing recent economic activity, and I also wanted to give you a feel for where the economy may be headed as we come up to the election.

Recent Fed/Economic Activity
After the Fed raised their benchmark rate by .25% on June 30, mortgage rates across the board actually went down by about that amount. To this point, economic data had been strong and the Fed sent signals it was time to preempt inflation by raising rates. So investors were trading on the possibility of a larger Fed rate hike and priced this prediction into mortgage bond markets. When the Fed only moved .25%, mortgage bonds markets quickly rallied sending yields (or rates) lower. Then came two months of horrible job growth … average jobs created for June & July was 55,000/month, compared to a 225,000/month average for the first five months of 2004. Also 2Q GDP data released in June showed economic growth slowed to 3% from 4.5% in Q1. And oil prices spiked in July & August, which hit consumers hard at the gas pump. Yet the Fed insisted all this weakness was transitory, and raised rates another .25% on August 10. The markets disagreed, bought bonds, and helped keep mortgage rates low despite the Fed move.

What It Means For Mortgage Rates
This is the current state at press time. When you read this, August job growth will be out and it’ll be less than a week from the Fed’s September 21 rate policy meeting – the last one before the election. Overall, I think rates shouldn’t go up significantly before the election because of all the uncertainty … Who will be President? Will terrorists try to disrupt our election? Will oil prices level off? Can companies grow and create more jobs? It’s true that money can’t be as cheap as it has been in recent years, but also, the cost of money can’t rise too fast unless consistent economic growth warrants it. So far, this sustained growth is just not there.