WeeklyBasis 4/28/08: Nearing End of The Fed Rate Cut Cycle

Fixed and ARM rates are up about .2% this week as bond markets start pricing in a possible end to Fed rate cuts. The results of this week’s FOMC rate policy meeting will be announced Wednesday, and markets expect a .25% cut to the Fed Funds Rate, which is a rate commercial banks charge each other for overnight lending. We also might see a .25% cut to the Discount Rate, which is a rate Fed banks charge commercial banks for loans lasting from one to 28 days.

It’s likely that the Fed will caution markets against further rate cuts. Since August, the Fed has cut the bank-to-bank Fed Funds Rate 3% (from 5.25% to 2.25%), and cut the Fed-to-bank Discount Rate 3.75% (from 6.25% to 2.5%). Factoring in inflation estimates, this puts real Fed rates at zero or negative, so there’s really no room to go lower. Further Fed cuts would continue to hurt the dollar, and a weak dollar raises prices for imports which is inflationary. Also, a weak dollar can cause foreign investors to sell dollar assets. When they dump stocks, it’s bad economic growth overall. When they dump bonds, it has a direct upward impact on rates (since bond yields, or rates, rise when bond prices drop). If the Fed indicates an end to cuts, mortgage rates would move higher.

This is also a big week for economic data. Most notably, Personal Consumption Expenditures, the Fed’s favorite inflation measure, will be released Thursday and the employment report is Friday. Estimates call for about 80,000 jobs lost and .1% inflation. If these both came in at estimates, mortgage rates would be same or better. If job losses were less and inflation was higher, mortgage rates would move higher.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.125% (6.275% APR)
15 Year: 5.875% (6.015% APR)
5/1 ARM: 6.25% (6.39% APR)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 7.0% (7.14% APR)
7/1 ARM: 6.625% (6.765% APR)
5/1 ARM: 6.125% (6.275% APR)