Fed Rate Cut October 31st

Mortgage and Lending with The Savings Bank NMLS ID # 40276

Today's FOMC adjournment brought us the expected quarter point rate cut that was expected by many, but the post-meeting statement created concern about inflation. The Fed referenced the weak housing market as a contributing factor to the change in short-term interest rates, but also indicated that inflation remains an issue, particu larly with the high energy and oil prices we are currently seeing.

The move and comments leads many to believe that the Fed will not make another rate cut in the near future. The stock markets have surprisingly reacted well to the news with the Dow up 131 points and the Nasdaq gaining 35 points. However, the bond market and mortgage rates have not faired so well. The bond market is currently down 23/32, which will likely revise this afternoon's mortgage rates higher by approximately .25 of a discount point from this morning's rates.

This morning's release of the 3rd Quarter Gross Domestic Product (GDP) revealed a 3.9% annual pace of economic growth, exceeding forecasts of a 3.1% rate. This means that economic activity was moderately stronger than expected. However, offsetting that was good news in the key inflation reading within the report. It showed a significantly lower reading than was expected, indicating inflationary pressures were we ll under control.

Also posted this morning was the 3rd Quarter Employment Cost Index (ECI), which tracks employer costs for salaries and benefits. It showed a 0.8% that was slightly lower than forecasts. This can also be taken as good news for bonds and mortgage pricing because it eases wage inflation concerns.

Now that the Fed meeting is behind us, we have to turn our attention to the remaining economic news of the week. There are a couple of high-impact reports still left to be posted that may significantly affect the markets and mortgage rates.

September's Personal Income and Outlays report will be posted early tomorrow morning. This data gives us an indication of consumer ability to spend and current spending habits. It is important to the markets because consumer spending makes up two-thirds of the U.S. economy. Rising income generally indicates that consumers have more money to spend, making economic growth more of a possibility. This is bad news for the bond market and mortgage rates because it raises inflation concerns, making long-term securities such as mortgage related bonds less attractive to investors. Analysts are expecting to see increases of 0.4% in income and 0.4% in outlays.

The Institute for Supply Management (ISM) will release their Manufacturing Index for October late Thursday morning. This index measures manufacturer sentiment and can have a considerable impact on the financial markets and mortgage rates. Current forecasts call for a decline from September's 52.0 reading. If we get a reading below 51.5, we should see mortgage rates drop tomorrow morning. On the other hand, a reading above 51.5, indicating manufacturing activity may be stronger than thought, could fuel a stock rally and drive mortgage rates higher.

If I were considering financing/refinancing a home, I would.... Float if my closing was taking place within 7 days... Float if my closing was taking place between 8 and 2 0 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Comments (5)

Todd Hueffed
Champions Real Estate Services - Everett, WA

Great insight and well written thank you


Todd Hueffed

www.ThatHomeZone.com in partnership with Keller Williams North Seattle

Oct 31, 2007 08:27 AM
Konnie Mac McCarthy
MacNificent Properties, LLC - Cobb Island, MD
Broker/Owner - VA & MD "Time To Get A Move On!"
I am not sure how inflation can be an  issue when the housing market is in the toilet....but that shows how much I know
Oct 31, 2007 08:32 AM
Lori Nasshahn
Gilchrist Real Estate Company - La Pine, OR

Thank you for the good information. I'm not real savvy when it comes to the nitty gritty of the economy. Your post helps me to understand how one thing affects another.

Lori Nasshahn

Oct 31, 2007 08:41 AM
Jeff Sarkisian
The Savings Bank - Andover, MA


Yes, I have no idea how that works, Went to university of Maryland, miss it down there

Oct 31, 2007 08:42 AM
David Keslar
Americas Largest Bank - Portsmouth, NH

Hello jeff, 

I'm glad that you had an education.  Where do you see mortgage rates heading the next several months.  We are looking at buying a second home and the rates need to remain low.


May 07, 2008 05:19 AM