WeeklyBasis 6/23/08: Is Fed More Afraid of Inflation or Recession?

Fixed and ARM rates are up about .2% over the past two weeks. Rates were actually higher as recently as last Thursday because higher consumer and producer inflation data caused bond markets to sell off, pushing yields up. But then renewed credit crunch woes started coming back into the picture. This week it’s been led by pressure on investment banks as regulators promise to hike capital requirements and limit leverage which will threaten future profits. Goldman Sachs and Citigroup I-Banking divisions hinting at 10% workforce reductions.

So are record food and gas prices more of a concern? Or is it a lack of credit our businesses need to innovate the bigger issue? The Fed will provide some guidance Wednesday 11:15 Pacific time when they announce the rate decision from their two-day FOMC meeting. After seven consecutive cuts to the bank-to-bank Fed Funds rate and the Fed-to-bank Discount Rate since September 2007, we can expect a pause. This would leave Fed Funds at 2% and the Discount Rate at 2.25%.

But in light of recent inflation concerns expressed by Fed chairman Ben Bernanke (as well as ongoing concerns expressed from other voting FOMC members), it’s reasonable to expect the bias to change from recessionary to inflationary. A definitive inflationary bias isn’t a foregone conclusion because the Fed’s job is to walk the tightrope with monetary policy that doesn’t over-stimulate or stifle economic growth. But it would be unwise for the Fed to ignore rising food and energy prices by only looking at “core” inflation readings which exclude these items.

Also this week, we have S&P Case Shiller home price data; New and Existing Home Sales Wednesday and Thursday; Q1 GDP Thursday; and Personal Consumption Expenditures data Friday, which is the Fed’s favorite inflation measure. If this Friday PCE number comes in higher following an official inflation-watch bias from the Fed Wednesday, rates will rise more.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.25% (6.39% APR)
15 Year: 6.0% (6.15% APR)
5/1 ARM: 6.25% (6.38% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.5% (6.65%)

Jumbo ($650,000 – $1,000,000) – NO POINTS
30 Year: 6.875% (7.025% APR)
7/1 ARM: 6.5% (6.64% APR)
5/1 ARM: 6.25% (6.40% APR)