Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – March 26, 2007

Interest Rates Chico CA

The financial markets sat with pins and needles, this week, waiting to see what the Federal Open Market Committee was going to do with the overnight rate of 5.25%.  As expected, they ended up leaving the Fed Funds Rate at this current level.  Their policy statement did have some interesting changes to its tone, however, indicating that their next move might be to lower the overnight rate, as opposed to increasing it.

However, the fed also mentioned that Core Inflation (interest rates worst enemy) continues to hover above the fed’s comfort level, and the overnight rate will not be cut as long as inflation is a threat.  Basically, it’s the Fed’s job to keep inflation in check.  Their favorite tool for measuring inflation is the Core Personal Consumption Expenditure Index.  This index has consistently been over 2.0% and the Fed Funds Rate will not change until this index sits at 2.0% or lower for a few consecutive months…so don’t expect the overnight rate to change for a while.

The housing sector gave us mixed signals this last week.  New construction housing starts were higher, yet new building permit requests were lower.   Nationwide, existing home sales surprisingly rose in February marking the largest monthly gain since March 2004 and the highest pace of sales since April of 2006.  Many experts feel as though the housing market saw its worst levels around August of last year.  This is good news for the housing market, and with rates still at or below the 6.0% level, a wonderful time to buy a home.

When Bond prices go up (their yields move down), home loan rates improve, and when Bond prices go down (their yields move up), home loan rates worsen.  A good mortgage broker will follow these movements and know when a good time to lock in an interest rate is.  There are also “trends” that bonds (mortgage backed securities) follow.  For example bonds will make a 25 day, 50 day, or 100 day moving average that they like to stay close to.  By watching and measuring these “averages” or “trends” you can generally tell where bonds (and therefore interest rates) will move.

Weak or negative economic news generally is bad for the stock market, and good for bonds or mortgaged backed securities.  Good economic news will cause investors to put funds into stocks and generally take money out of bonds, causing these bonds to move lower, and therefore their yields higher…causing higher interest rates.  Over the past couple of weeks we have had interest rates bouncing in between two “trends” or “averages.”  So, as economic information came out…interest rates would trade between these two levels of support (trends), causing a lot of stableness.  This week holds a lot of economic reports.  Every day there is something being released.  New Home Sales, Consumer Confidence, Durable Goods Orders, Final 4^th Quarter GDP, and finally, on Friday, the Personal Consumption Expenditure Index.

So, look for slightly lower interest rates throughout this next week.  However, be wary of this Personal Consumption Expenditure Index…it could wipe away all of our gains.

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