Where are Mortgage Rates headed?

"LIFE IS NEVER BORING...BUT SOME PEOPLE CHOOSE TO BE BORED." Wayne Dyer Yet even if Traders had wanted to be bored last week, the financial markets had other plans. Volatility reigned supreme, with large swings throughout the week in Stocks, Bonds, and home loan rates — and once the smoke cleared, home loan rates were slightly worse than where they began the week.
What caused all the volatility? You name it — continuing concerns on the liquidity and stability of the financial markets; the Federal Reserve at work, cutting the Fed Funds and Discount Rates by .25% and the opening of a new auction facility; a red hot Retail Sales Report; and last but certainly not least, the Producer and Consumer Price Indices both showing inflation to be much higher than expected.
The big mover was the Fed rate cut of .25%, which was a disappointment to the financial markets, as a deeper cut was hoped for. The reaction was very negative for stocks, as the fear of a recession amidst the current credit crunch grows. There are increasing concerns that the Fed is not getting ahead of this problem.
But it is not an easy job for the Fed because they may be fighting a possible recession with a hand tied behind their back...this is due to higher levels of inflation. Surely inflation is still at reasonable levels, but even a little stronger inflation can take a major toll on our lifestyle over time. High levels of inflation have caused unrest, revolt, poverty and wars. It is possible that the Great Inflation of 1920 in Germany eventually led to WWII. During that time, prices rose over an almost unimaginable 1000 times a year! Savings were wiped out and imagine this...the cost of a loaf of bread went from 20 Marks to 20,000 to 20,000,000. And in Mexico, hyperinflation caused a crisis in the peso that has led to extreme levels of poverty. Of course, the US is nowhere close to this type of problem, but inflation is a very serious issue. And with the current rate of inflation in the US ticking higher and towards the upper range of acceptable limits, additional Fed cuts would push inflation even higher. So should the Fed risk a recession to protect against inflation or move to avoid recession and risk inflation? This will likely be one of the hotter economic topics of 2008.
So the week was certainly far from boring — and the volatility may just continue ahead. Yet overall, home loan rates continue to be at very low levels — so if you, or a client, friend, family member or neighbor have been contemplating a refinance or home purchase — now is the time to start making plans. Although the holiday season is a busy time, I am glad to make time for you and your referrals. And even if you don’t have a home loan need at the present time — it’s always wise for us to examine your overall debt structure and financial goals, just to ensure that you are positioned in the best possible way.
AND SPEAKING OF PLANNING...WHAT WOULD YOU DO IF $64,000 LANDED IN YOUR LAP TOMORROW? YOU MIGHT HAVE A FEW IDEAS IN MIND INVOLVING A TROPICAL HOLIDAY — BUT WOULD YOU REALLY KNOW WHAT TO DO IF YOU SUDDENLY CAME INTO AN INHERITANCE? THAT’S THE QUESTION OF THE DAY — SO DON’T MISS THIS WEEK’S MORTGAGE MARKET VIEW.

President Woodrow Wilson signed into law the Federal Reserve Act in 1913,
creating the Federal Reserve, the nation's central banking system. The Federal
Reserve, or Fed, has also been called "the gatekeeper of the US economy" because
of its unique power to influence US financial and credit markets.
Comprised of seven presidentially−appointed Board of Governors; the Federal Open
Market Committee; 12 Federal Reserve Banks; and private U.S. banks and advisory
councils, the Fed's mandate is "to promote sustainable growth, high levels of
employment, stability of prices to help preserve the purchasing power of the dollar,
and moderate long−term interest rates." In other words, the Fed's job is to regulate
the nation's financial institutions while simultaneously keeping inflation in check.
To accomplish this important yet difficult task, the Fed studies economic indicators,
creates, and then implements monetary policy − its specific plan of action or "target" for the economy − based on its
findings. And while there are many tools at its disposal, the Fed has three main instruments of monetary policy: open
market operations, interest rates, and reserve requirements, all of which can impact the mortgage industry.
Open market operations, the principal tool used by the Fed in its monetary policy, consist of the buying and selling of U.S.
government and mortgage−backed securities (treasury bonds, notes, and bills) on the "open market." Basically, the Fed
buys when it wants to increase the flow of money and credit, and sells when it wants to reduce it.
The Fed also controls two important interest rates: the discount rate and the fed funds rate. The discount rate is the
interest rate charged by Federal Reserve Banks to commercial banks and other eligible financial institutions on short−term
loans. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit,
secondary credit, and seasonal credit, each with its own interest rate. Experts say that changes in the discount rate can
serve as a clear announcement of a change in the Fed's monetary policy. These changes are important because they can
impact lending rates for banks and interest rates for the open market.
According to the Federal Reserve, the fed funds rate is the interest rate at which depository institutions lend balances at
the Federal Reserve to other depository institutions overnight. Like the federal discount rate, the fed funds rate is another
tool the Fed can use to control inflation and other interest rates. This interest rate is often a source of intense speculation
whenever the Federal Open Market Committee meets, creating uncertainty that can move the financial markets as well.
Finally, think of reserve requirements, the last of the Fed's main monetary policy instruments, as the cash deposit
requirement for a secured credit card. Reserve requirements represent the specific portion of deposits that banks are
obligated by law to keep in non−interest−bearing funds at a Federal Reserve Bank, typically 10%. Consequently, as banks
attempt to stay as near to the reserve limit as possible without dropping below, they constantly lend money back and forth
to each other. The Fed, interpreting signs of inflation in its economic indicators, may choose to reduce the amount of
reserves available to banks by slowing the selling of securities. Generally, this causes interest rates to rise, the economy
to slow, and inflation to slow with it. The reverse is generally true when indicators suggest a slowing economy or deflation.

If you or your clients have any questions about the Federal Reserve, inflation, interest rates, or any of the topics
discussed in this piece, please don't hesitate to give me a call. The Fed's monetary policy is not only fascinating,
your clients would benefit greatly from understanding its impact on the financial and credit markets