The Commerce Department reported this morning that the closely monitored November Consumer Price Index plunged 1.7% from last month's level, lead by a massive 17% drop in energy prices.  It was the largest monthly decline for the headline consumer price index since the government began keeping records in 1947.  Core prices, a value that excludes the more volatile food and energy components, were flat in November.

In a separate report the Commerce Department announced housing starts and building permits plunged to record lows in November.  Starts were 18.9% lower while permits slumped by 15.6%.

The sharp drop in the rate of inflation at the consumer level leaves the door wide open for the Fed to cut their benchmark fed fund rate by 50 basis-points today - a move that has been priced into the mortgage market for weeks.  Futures traders are assigning a 66% probability to the idea that central bankers will choose to slash 75 basis-points from short-term interest rates. 

It really doesn't matter how much the Fed actually cuts - market participants are well aware that the fed fund rate (the interest rates banks charge each other for overnight loans) and the discount rate (the interest rate at which member banks may borrow short-term funds directly from the Federal Reserve Bank) can't go below zero.  While it may not happen today - the Fed is almost certain to push short-term rates to 0.0% at their January 28^th meeting.

With rates approaching zero, mortgage investors will scour this afternoon's post-meeting statement from the Federal Open Market Committee for hints on what Chairman Bernanke and his band of merry central bankers plan to do next to help pull the economy out of this steep recessionary dive. I suspect policymakers will "talk-up" plans to become a major buyer of treasury obligations and mortgage-backed securities.  Look for mortgage investors to show little reaction to this chatter -- since the Fed has done little with the $600 billion they have already been authorized to spend.

Today's conforming 30 year fixed rate is at 5.125%.