Interest Rates - Crazy Week!

This has been a BIG week of economic news and events!  Yesterday we saw the Fed reduce the Fed Funds and Discount rates by a .25% each down to 2.00% and 2.25% respectively.   Remember, these rate drops directly affect HELOCs, auto loans, credit cards and short term rates...mortgage rates are determined by the bond markets and more specifically, mortgage backed securities!

Usually we see mortgage rates increase shortly after stimulating activities by the Fed because of inflation fears.  Inflation is the ARCH-ENEMY of bonds!!!

This time, however, mortgage rates improved slightly because of the Fed's statement about "monitoring" inflation closely which signified to markets that the Fed may be moving away from the stimulate stance and into a do-nothing-and-watch stance.  This helped keep bonds and mortgage backed securities appealing to investors which resulted in mortgage rates improving slightly.

Recently, inflation has ticked upward even though our economy is not growing.  Jobs are being lost, real wages are showing weakness, and yet prices continue to increase!  The increase in prices, mostly food and energy prices, can be attributed to an increase in GLOBAL demand due mostly to the continued development of China and India economies.

The jobless claims and jobs reports are built off historical averages; because of this the reports are going to be better than reality and will paint a rosier picture of the current slowing state of our economy.  Mortgage backed securities will react poorly and interest rates should increase.  Later, once more accurate data is available to the Bureau of Labor Statistics (BLS), former jobs reports will be revised downward and mortgage backed securities will then rebound.

So here is my advice when it comes to locking or floating your interest rate:  If you are closing within the next 3 weeks, lock your interest rate now!  Beyond 3 weeks, I recommend floating, however, be prepared to stomach some volatility!!!