WeeklyBasis 01/29/08: Bernanke is No Greenspan

Fixed and ARM rates are up slightly this week on mortgage bond weakness. Factory orders came in stronger than expected today, and bonds took this as a subtle sign that the Fed may only cut 25 basis points instead of 50. They’ve already cut 175 basis points in the past 4 months, and it typically takes at least six months for Fed rate adjustments to reflect in economic data. My bet is that they still cut 50 basis points, since the Fed’s mission right now is to “reduce tensions in bank lending,” as Fed chairman Ben Bernanke very explicitly told the House Budget Committee 10 days ago. To me, this clear short- to medium-term Fed mission proves all the noise about the Fed being a slave to daily market movement is misguided. This week we also have GDP, the Fed’s favorite inflation measure (personal consumption expenditures), and the jobs and wage growth report Friday. The week has been somewhat quiet but the volatility is about to come back with a force.

For locks I have this week, I am locking ahead of all the data because rates are very good right now and will swing wildly in the coming days. Also, for all purchase clients up to $1m purchase price, I have been talking about loan strategies that enable them to capture the forthcoming conforming loan limit hikes – which will re-set for one year to somewhere between $625k and $729k. If this is the case it changes things for people buying right now. There are ways for buyers in this purchase price range to capture conforming 30yr rates (instead of jumbo 30fixed or settling for an ARM to get a lower rate). Even if they’re buying now, I am talking to people about free or deeply discounted refis when the conforming loan limits change.

You’ll note that I am sending only commentary this week. I will resume sending rates next Monday. Please call for rate quotes.

And as a quick post-script: Even if we go down to 3% Fed Funds Rate this week, and even if we go to 2% Fed Funds, don’t expect this to stay for long. Greenspan keeping rates too low for too long got us into the housing mess we’re in now. Bernanke won’t make the same mistake. At this stage, a move like that would further erode the dollar and eventually cause inflation on top of a weakening economy.