Market Conditions:
Despite continued Fed rate decreases, the future of the US economy remains uncertain. The Fed is desperately trying to jumpstart the economy amid high commodities prices and the fear of inflation. Former Fed chairman Greenspan indicated last week that the Fed's actions probably wouldn't keep the economy out of recession. Usually economic weakness is good for bonds and bad for stocks. Unfortunately the bond market has been hit hard recently by huge losses from bond insurers and many investors fear the worst is yet to come.
Keep in mind that a Fed rate cut does not automatically mean mortgage interest rates will improve, as was evident following the last few Fed rate cuts. The Federal Reserve has direct control over the level of short-term interest rates. The Fed's influence over longer-term interest rates is less certain. Former Fed chairman Greenspan hit upon this fact last week when he noted, "central banks have less and less power to influence long term rates." Remember that the Fed cuts rates to help spur the economy. Usually funds exit bond holdings and enter stocks. This was exactly what happened over the past two weeks. Bonds fell pushing rates higher following the Fed rate cuts, while stocks showed strong gains.
The good news is that interest rates still remain very favorable. There is a very real possibility that longer-term mortgage interest rates could head lower if inflation fears subside and the economic weakness continues. However, lower rates are not a given. High commodities prices and liquidity concerns in the mortgage industry continue to weigh heavily upon the economy. Couple those concerns with reports of continued housing price declines and the short-term economic outlook looks dim.
Mortgage interest rates remain historically favorable and taking advantage of rates at these levels to lock in a low interest rate for years to come would be prudent.
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