The following are excerpts from comments on factors affecting interest rates from HSH Associates as of 6/29/06:
While noting that economic growth is moderating, the Federal Reserve Open Market Committee judged that inflation remains pesky, and lifted the Federal Funds target rate by another quarter-percentage point to 5.25%.
The last time Fed Funds was near these levels, the Fed was approaching what would become the fourth step downwards from what was then a ten-year high of 6.5% for the key short-term interest rate. However, we are on the other side at the moment, as interest rates are being lifted rather than cut. At present levels, the Fed Fund is thought to be mildly restrictive, retarding growth and hopefully trimming inflationary pressures.
Will the Fed “pause”? That’s an open question at the moment. In the May release, they judged that “some further policy firming may be yet needed” in the coming months; today, they said that “some inflation risks remain” but that “the extent and timing of any (emphasis ours) additional firming that may be needed” will depend upon the data. It’s our current opinion that the Fed will skip changing rates at the August meeting, but may add a little insurance later in the year, perhaps at the September meeting, and maybe again after that.
Shoppers now looking for variable-rate products tied to short-term indicators will find new, higher rates as lenders re-price their offerings.
Also, those borrowers with three-one Hybrid ARMs now approaching their first adjustment should also take notice, as their new interest rate will be measurably higher, as their fixed interest rate portion has been in the mid-4% range, and a new adjustment at today’s rates will push them into the mid-6s, where their per-adjustment interest rate caps will stop the increase (which would have jumped into the low 7s without the cap).
However, for at least some of those borrowers, today’s lift in short- term rates will mean that the interest rate on their ARM or Home Equity Lines of Credit may rise to a level equal to or above that of a 30-year fixed-rate mortgage available in the open market right now. That may prompt some additional refinancing activity, provided fixed interest rates remain fairly stable.