The Federal Reserve performs a tough balancing act. Keep rates to low and the economy over heats creating inflation. Push rates to high and you choke off growth and job creation. So, what is the Fed to do?
Well last week the Federal Reserve confirmed its fear of inflation by raising the discount rates again by 0.25% but it hinted that it may pause in the near term to assess “the evolution of the economic outlook”. There are likely to be two factors that the Fed will be focusing on. First, is the prospect of slowing growth which has been evidenced by a modest rise in Jobless Claims as well as a decline in Consumer Confidence? Some speculate that the moderate tone in the Fed’s last statement suggests the central bank is concerned that the economy may now be cooling too quickly. The other side of the coin for the Fed is the rise of inflationary forces. Weakness in the dollar and the sharp rise in energy costs are putting upward pressure on prices… and if there is one thing the Fed hates more then slow growth, it’s inflation.
The odds seem to favor the slowing growth scenario causing the Fed to keep rates on hold in June, but that may not be true for the longer outlook. Soaring commodity & energy prices have pushed up costs for business to operate. Higher costs combine with strong global demand should result in higher prices for goods and services. Inflation tops the chart as the most significant influence on the Fed and most economists agree that inflation is on the horizon. So, even if the Central Bank pauses for a breather in June, it is expected to raise rates further in the 4th quarter of this year and again in 2007. But until the market finds out which influence is the strongest, (inflation or slower consumer spending), mortgage rates should continue to fluctuate in the 6.500% to 7.000% range for the next couple of weeks.
Guest blogger, Michael Polera, is a loan consultant with Baird & Warner Financial Services. Michael can be reached at 847.818.6029 or by e-mail at michael.polera@bairdwarner.com.
Fran Bailey, Realtor
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Michael raises good points here. And while none of us can totally acurately predicate mortgage rates, neither can we predict what will happen with housing. If you read all the negative spin in the press you could quickly talk yourself into inertia – will interest rates go up? Better buy now! Will housing prices decline? Better wait! The truth is if you find a house that is right for you at a good price and you intend to actually LIVE there (as opposed to real estate as a financial speculation – and it is surely that right now on the investment side) then remember — you’ve got to live somewhere!
That said, I agree with Michael that it’s likely rates may well rise and they are still historically low.