I put up a post yesterday that generated a slew of response. I got a question from an ActiveRain member that I thought was worthy of responding to. In general, it was, "What's the Fed gonna do today?"
This is a great question and one you should have a high degree of knowledge about in order to dialog with clients and prospects at a level most in our industry still can't grasp.
Here is the content of my response -
I'm responding to your question about which way the Fed would move. Hmmm... no rate change? (That's a joke, of course.... By now, you know the Fed did not move rates.)
I would've gotten this one right though. And your question is worthy of detailed explanation. As a past Commercial Banker, I have been studying the Fed since the days of Paul Volker. There is a telltale trail of crumbs that can help us all predict with a fairly high degree of accuracy what the Fed will do.
Here's some things to remember:
- Bernanke is NOT Greenspan. That said, Greenspan did a fine job overall
- Bernanke is an open book and so far he has not played games. He says his overriding focus is on inflation and the Fed uses the Core PCE (Personal Consumption Expenditures) as it's favorite gauge.
- The Fed, for a long time, has shown no inclination to move rates just because of stuff that is happening in the equities markets or elsewhere on Wall Street.
Some things to watch:
- PCE - already covered that one - the Fed wants this to be under 2%, which it is... barely (that "barely" actually provides an upside risk to Fed rates. Keep an eye on it.)
- Jobs Creation - new monthly jobs created, say, greater than 150K/mth could be seen as a sign of an economy growing too fast. That'd result in upward interest rate risk.
- Unemployment - currently at 4.7% I think. This just moved up 1/10% and is a good sign. Anything under 5% is a bit of a risk, as it could create wage inflation, which then leads to inflation, which then leads the Fed to raise rates.
- ALWAYS... read the Fed Comments after a meeting - today's comments tipped a hat to what is going on in the equity and housing markets, but reiterated the Fed's continuing concern is the threat of future inflation. They think the economy is moving at an acceptable pace and that the global economy is good.
Now, two things to note: 1) The more you pay attention to what's going on, the better you'll be at predicting what will happen in the Fed and the overall economy and 2) As you read below, learn to "connect the dots" on how the Fed's moves will and will not affect our industry.
Here's what I see in my crystal ball with regard to our industry and the Fed - I think the shift in the mortgage markets in recent weeks, and especially in the past week, will really put a crimp in housing. Two reasons: 1) Fewer people will be able to purchase homes because of new lending restrictions and 2) as Adjustables continue triggering and people see the payment shock (and there will be shock), a lot of people will end up losing their homes. These two factors will serve to soften the housing market, cap appreciation, limit equity refinances (which has been funding our national economy in recent years) and will lead to an economic slowdown.
Now, that's just my opinion. My crystal ball has fallen on the floor a couple of times and I've had to patch it with band-aids. That said, and if my prognostication is correct, I foresee two to three more Fed Mtgs with no interest rate change, then early to mid 2008, a very slight move to rate decreases.
In closing, don't confuse the Fed Rates with Mortgage Rates. This is a very common misnomer and the two are not axiomatically connected. If you look at the past couple of years, as the Fed increased, then stabilized rates, mortgage rates did not run in tandem. In fact, mortgage rates occasionally ran opposite. Of final note - the current dynamic in the markets highlights the disconnect between the Fed and Capital Markets. Understanding what is really causing the current disconnect is something I will probably write about soon. Stay tuned... and add me to your associate list to learn more.
I hope this information helps you polish your own crystal ball so you can speak with your own clients and prospects with a degree of knowledge that requires them to think, "We've GOT to use this person because s/he understands things on a level no one else can even come near!" My goal is for you to be as wildly successful as you possibly can!
Greg Polashock is a Real Estate Home Mortgage Loan Consultant and Certified Mortgage Planning Specialist with Cherry Creek Mortgage and resides in Castle Rock, in Douglas County Colorado. He can be reached via email at Greg@GregIsFinancingSolutions.com, by phone at 303-887-0672 or on the web at http://www.gregisfinancingsolutions.com/.
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