Interest Rates Could Go Higher
A: I'm now starting to get the feeling that interest rates will be headed higher than previously thought and the idea of a feds funds rate of 5.5% was recently predicted by Lehman Brothers.
It pains me to say this but it looks like we are going to be facing a few more interest rate hikes as the fed looks to bring monetary policy to a "neutral stance"; neither hindering nor helping economic growth.
According to today's CNN Money article titled "Poole Sees Rising Interest Rates"...:
The economy has a "great deal of momentum" and the Federal Reserve may have to raise interest rates further, especially if growth exceeds expectations, one of its top policy makers said Monday. "Should we get data in the coming months that are consistently strong, particularly if there are substantial upside surprises, then that says we're going to have to step a little harder on the brake," St. Louis Federal Reserve President William Poole told Reuters.My last report on interest rate policy had me at 85 - 15 in favor of a rate hike at the next meeting, and 50 - 50 for another rate hike at the following meeting. It's time to revise these numbers upward and bring my current thinking to 95 - 5 in favoir of a rate hike at the next meeting, and 65 - 35 in favor of another rate hike at the following meeting.
As I browse Matrix today, I see Jonathan Miller is thinking the same way I am as he reports on this issue:
As a sign of more difficult times ahead, specifically in the real estate economy, analysts are beginning to raise their estimates as to how high the Fed will go until they feel inflation is in check. Consensus has been to either 4.75% or 5%. Lehman Brothers has just increased their federal-funds rate peak to 5.5% in August or September. They have not penciled in a policy reversal at any time in the next year and a half [Barrons]. Their reasons for the change:1. Although the housing market is cooling off, the process is slow and Fed Chairman Bernanke has reiterated the idea that the Fed will respond slowly to the cooling.
2. The economy is showing more underlying strength than we had expected. Therefore, it will probably take longer for the diminishing housing-wealth effect to overcome an even stronger underlying trend in growth.
Boy oh boy oh boy. What a ride this 'new' fed is taking us on here as everyone keeps upping their estimates on how high the fed will actually go with rates. Six months ago most of us thought we would be done by now; man were we off the mark! But that's the way it is and at least we have a good idea now of where we are headed.
Worst Case Scenario: If Lehman Brothers is correct and the fed really does raise the feds funds rate to 5.5% (we are at 4.5% now), expect 30YR mortgage rates to easily exceed the 7% mark and possibly go closer to 7.5% when all is set and done. As money gets more expensive to borrow, buyers will be even more hesitant to pay top dollar for any property across the country.
~ Poole sees rising interest rates
~ The Housing Boom is Over & The Economy Feels A Little Too Fine
