Comments on Interest Rates from HSH Associates

Excerpts from 3/17/06 newsletter:

After stomping higher in recent weeks to three-year highs, 30-year fixed rate mortgages (FRM) eased back a little. The average 30-year FRM dipped by two basis points.

While reports of rising inflation and continued strong growth have blown interest rates higher in recent weeks, this week’s cooler breezes of gentler growth measurably soothed the markets. Last week, according to the futures markets, there was a 100% chance that the Federal Reserve would lift rates not only at the end of this month, but also in May. After the cooler winds of data this week, that possibility eased back to less than 100% for March, and perhaps 80% for May.

As a number of Fed governors have made clear, the Fed is more likely to use fresh incoming data to guide policy now that it’s about done with its plan to bring interest rates back up from emergency levels. Certainly, a tempering of growth and inflation removes the likelihood that a more aggressive Fed policy will develop; the sum of this week’s data was in the right direction in that regard.