Houston's Rate Sheet

Last week, the Federal Reserve moved to cut rates 25 basis points. The Fed opted for the 25 basis point cut, even though, many on Wall Street had lobbied for a 50 point cut. By Wednesday, the Fed move looked to be prophetic. Based on the Producer Price Index (PPI) and the Consumer Price Index (CPI), it appears that inflation is on the rise. The Fed’s primary goal is to curb inflation first and fight recession second. With inflation rising and economic growth slowing, the Fed has their work cut out for them. If the Fed decides the raise interest rates, which would be standard policy to curb inflation, they would assuredly put the economy on the road to recession. If they decide to cut interest rates, which would be standard policy to spur economic growth, they could prove send inflation soaring. The 25 basis point cut appears to be a happy medium at this moment.

There are added concerns due to the nature of our economic difficulties. Currently, the real estate market is in negative growth. If the Fed does indeed cut rates, inflation will run up unchecked and fixed rate interest rates will surely rise. This could cause home buying to fall even further, and home prices would be pushed even lower. If the Fed decides to raise interest rates to halt inflation, then Adjustable Rate Mortgages and Home Equity lines of Credit (HELOC) will surely rise. This could lead to an even higher rate of foreclosure, which would also send home prices even lower. It is a tough spot. All we can do is wait and see.

Thanks to the high inflation numbers, mortgage rates rose last week. Bankrate.com’s overnight average on the 30-year fixed rate mortgage rose to 5.88 percent, up a sizable amount from last week’s 5.76 percent. Other mortgage products followed. The 15-year fixed rate mortgage rose to 5.46 percent, up from last Monday’s 5.33 percent. And the 5-year Adjustable Rate Mortgage rose to 5.67 percent, up from last week’s 5.60 percent.

This week will feature more inflation news. The Personal Income and Outlays report, which contains the Fed’s favorite inflation measure the Personal Consumption Expenditures (PCE) price index, will be released on Friday. If this report also indicates rising inflation, it is likely rates will move even higher. However, if this report shows inflation is slowing, that might be all rates need to level off or even move lower. The markets remain very volatile, so it is important to make sure borrowers lock in their interest rates as soon as possible.

Also this week, the Housing Starts report will provide us with some insight into the health of the residential construction industry. And on Monday and Wednesday, there will be speeches given by Fed Board members. These speeches could provide us with some insight into the policy leanings of the Fed as they move towards their next meeting in January.