The Mortgage Man

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Wednesday June 25, 2008

The FED will discuss the economy and how inflation and oil prices enter the mix.

As I write this post (at 11:07 CT), we are a little over 2 hours away from the press conference to reveal the results of this month’s FED meeting.  No one on the street expects the FED to move on interest rates (up or down), and mortgage bonds are trading flatly because of it.

It is understood that there are many factors at play in today’s economy, but there is very little argument that rising oil prices are at the forefront of the discussion.  Again, we can discuss the “chicken or the egg” scenario of why we got where we are today.  Did oil prices cause inflation?  Did inflation cause a devaluation in the dollar leading to higher oil prices?  Does inflation really exist, or is it a self fulfilling prophecy from the lack of consumer confidence?

Based on the numbers and definition of a “recession”, we are not currently in one.  However, if you asked 100 people on the street that same question, I believe that 95 of them would believe that we are in a recession.  This is actually important because if people are uncomfortable about the state of the economy, they tend to spend less.  This Consumer Sentiment can help to fuel a recession, or even create one because as people tighten up their wallets, businesses suffer, the employees of those businesses suffer through cut pay or layoffs.  Those employees are forced to look for a job in a market where 100’s of their counterparts are looking for the same thing, leading them to spend less on discretionary spending, and so on and so on.

There is little doubt that we are in a rough economy, whether you want to label it as a recession or not.  But the question is how do we fix it when raising rates to strengthen the dollar puts another nail in the coffin of the already strugling real estate market.  At the same time, lowering rates may give a boost to the real estate market (or maybe not), but in turn, it lessens the value of the dollar even further giving oil prices nowhere to go but up.

These are difficult times with no easy answers, but ultimately without a stronger dollar, we are in real trouble in the global economy with the deficiency between the Euro and the Dollar, and the fact that oil prices are tied to the US Dollar.

If you have an active mortgage file, you might as well float the rate until the contents of the meeting hit the street at at 2:25 ET, then hold on to your seat if they say anything other than extreme concern about inflation.

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1 Comment»

  Joe Manausa wrote @

Well said. I think we have a lot of give-back before we can make the dollar strong again.


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