Hello Everyone,
It has been a busy week in the interest rate and financial markets. There was a lot of news to digest but I want to focus on the three highlight reports. Those were the Fed meeting and rate cut, the 3rd quarter GDP report and today's employment report. The Fed meeting went from Tuesday to Wednesday and while they were meeting the GDP report came out. It indicated economic growth that was much higher than expected with a growth rate of nearly 4% (more like 3% was expected). This growth came in despite a weak housing market and the economy has managed to grow at almost 4% for the past 2 quarters! This does not indicate that the sluggish housing market is having an ill effect on the economy overall nor does it bode well for lower rates.
On Wednesday the Fed cut the Fed Funds rate and the Discount by .25% each. This was pretty much as expected and priced into the market. I had been mentioning that for a few weeks now. However the tone of their statement indicated that they may be done cutting rates unless and until we see more economic weakness (which the 3rd GDP report doesn't indicate). The Fed remains concerned about inflation, as well they should be. With oil at nearly $100 a barrel it's only a matter of time before we are paying $4 a gallon for gas and that will undoubtedly slow the economy and drive prices for everything higher. That is a concept called stagflation where growth stagnates and inflation increases. It's ugly and we don't want to go there if we can help it. On the flip side however, declining home values are deflationary and if the Fed keeps things tight for too long it will only make that worse. The quandary for the Fed is do they destroy housing in order to save the economy or can they manage to save housing without doing too much damage to the rest of the economy?
The third news item for the week was today's surprising employment report showing 166,000 new jobs being created in the last month. The consensus among the experts was to see 85,000 new jobs. Again, more good news for economic growth and bad news for interest rates.
With all this bad news you might have expected to see rates higher today. However, mortgage rates are unchanged and Treasury rates are lower from where we were last week. Why you ask? The drop is mostly due to ‘flight to quality' buying in bonds as we've seen the stock market sort of melt down some this week. There was also more talk of more trouble ahead for banks and investment banks that are heavily invested in mortgage backed securities. The difficulty for the market is trying to determine whether or not the Fed is done cutting or if more rate cuts are to come. There is some good news. At least this time we are not seeing rates bounce up immediately after the Fed rate cut like we did in September.
Have a successful weekend and please call on me if I can be of service.
If you'd like to see the rate sheet attachment to this message, please send me your e-mail address and I will forward it to you!
Blaine R. Bailey
Sr. Mortgage Consultant
Prestige Mortgage
404-402-7184
baileybr@bellsouth.net
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