WeeklyBasis 11/20/06: Fed Wants Rate Hike Despite Housing Outlook

Fixed and ARM rates are down about .125% since last week’s inflation data came in well below expectations. Many thought this would cause a bigger rate drop in the bond market, but here’s why it’s not coming quite yet. Inflation data usually lags the market by about six months, so the slow economic growth back in summertime created the low-inflation data that bond markets are reacting to now. But right now, corporate earnings prospects are strong, and major stock indices are posting record highs. Some Fed officials worry that this kind of growth could stoke inflation again. The Fed’s job is to fight inflation by raising rates or to stimulate growth by cutting rates. There’s one Fed official in particular, Chicago Fed president Michael Moskow, who’s been calling for another hike and that’s what is making markets nervous. I see this as a tactic of Bernanke’s Fed team to control markets with commentary, not just monetary policy. But the Fed-speak is missing a critical element: the economic impact of the housing slowdown also lags markets – job losses and slowing growth across housing/building sectors still hasn’t fully been realized. This will surely slow some of the stock market momentum in coming months, and shift the Fed mindset back to one of cutting rates some time around 2Q2007. As for this week, there’s not much data on tap so we should remain in our current rate range. Happy Thanksgiving!

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.125% (6.265% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 6.125% (6.275% APR)

Jumbo ($417,001 – $650,000) – NO POINTS
30 Year: 6.25% (6.39% APR)
10/1 ARM: 6.375% (6.515% APR)
5/1 ARM: 6.25% (6.4% APR)