Posted on 06/26/2005 11:12:49 PM PDT by RWR8189
WASHINGTON, June 26 - Federal Reserve officials, who meet this week, are beginning to suspect that the perplexing decline in long-term interest rates is more than a temporary aberration.
The possibility has major implications for the economy, and it creates new puzzles for Fed officials on how they should respond.
On Thursday, the Fed is all but certain to raise the federal funds rate on overnight loans between banks by another quarter point, to 3.25 percent. That would be the ninth increase in the last year, and the central bank is expected to signal that it will continue to raise overnight rates at a "measured" pace.
But the real debate at the meeting is expected to be about the unexpected decline of long-term interest rates, which have kept mortgage rates at their lowest level in decades and fueled what many analysts fear is a bubble in housing prices.
Alan Greenspan, chairman of the Federal Reserve, said in February that the low long-term rates were a "conundrum" but might simply be a "short-term aberration."
But Mr. Greenspan and other senior officials are now suggesting that the change is more enduring. The debate is over why the change has occurred, and different theories lead to sharply disparate conclusions about the best way to respond.
"My sense is that people think this could be the new reality, that this could be fundamental, that it could be long-lasting," said Laurence H. Meyer, a former Fed governor and now vice chairman of Macroeconomic Advisers, a forecasting firm.
(Excerpt) Read more at nytimes.com ...
For some reason, I think this is a good thing
IMHO the rates reflect the belief that the long term prospect of inflation in the US is very low and confidence that the dollar will remain strong..and the economy strong long term is good. I think this reflects underlying strength of US economy and belief by all investors that the US and the $ can't be beat..in the long run.
The realestate boom could be greatly reduced by raising tightening the credit requirements and drying up zero down loans.
I took macro and micro econ, but I am clueless about why this would be a bad thing.
I guess I would have to be an econ major to figure it out...lol
That's the point of the article.
The Fed has been raising short term rates for a year now, and long term rates have remained flat.
The "conundrum" as the Maestro puts it.
Well, my guess is, to some lendors, this is a bad thing, because this means loans will be nowhere near as profitable for them, and for sub-prime lenders, this could be even worse, because as normal rates stay low, even theirs will start to feel the effects of this.
If that is true, the flood of foreign money into the country could be diluting the Fed's effort to prevent inflation. That would imply that the Fed needs to raise rates more than many investors are expecting.
It is true that the flood of foreign money exists, and is likely to be having some effect on keeping our long-term interest rates down. But the utter weakness of long-term rates still seems odd.
In my area, homes average $300,000. Most young couples don't have $20,000 to $30,000 for a down payment. There's no low cost or affordable housing either.
Yes, it means that the middle class is disappearing.
Or just being redefined.
I locked in mortgage rate at 6% 2.5 years ago and feel foolish for it. If I went adjustable I'd be paying half has much all these year - and possibly now going forward many years into the future. But I was really figuring over 30 years it would more than pay for itself if rates every did climb back to 8 or 9 or higher. Perhaps I was wrong and those days are over.
My friend went with interest only loan in 1997, converted it to adjustable in 2001. He's lived in a home for dirt cheap all these years, and saw his home value rise 8 times what he paid for it. He has a 1 bd above his garage that he rents, and it covers a fair portion of his mortgage. He has since refinanced and bought a property in St. Tropez, fully protected under a corporation. They could some day forclose his home here, but he'll always have his other property to live in - and it's a duplex, so he can live in one and rent the other. He can easily get $3000 a week in the summer months in rental income.
A penny candy of 30 years ago is now selling for a quarter.
This tends to make saving money silly when its value is eroding, the trick is to save something that will hold value.
I like to be optimistic about the economy. However, I am not certain how much longer the economy can continue to absorb out-of-control energy costs and not see a resurgence of inflation. Also, not to even mention the "R" word, in the past 35 years, every time the economy tanked, there was a higher energy component involved.
However, I am not certain how much longer the economy can continue to absorb out-of-control energy costs and not see a resurgence of inflation.
Exactly, we could see a situation with inflation and a falling economy at the same time.
So long as the Chinese economy is doing well, the inflation that the US put on the train by "devaluing" the dollar-cranking out far more of them than the market called for- is being exported to China, at least partially. In this country it is showing up in the prices of oil and housing and in the little junk that doesn't get measured, i.e. cokes and nailclippers and coffee-by-the-cup.
the price of oil does not cause inflation. The amount of money in circulation is inflation. If that has not increased inordinately then as oil goes up other things must go down commensurately. That is not currently the case. Inflation is strong. Much of it is exported to China as China uses its dollars to buy US securities and prices inside China go up. Here we have exploding housing prices and, of course, oil. These manifestations are dismissed as not being part of the "core" inflation rate.Because these prices are rising so strongly and the so-called core rate is NOT declining, inflation is strongly indicated.
Long term rates have actually gone down.
The "conundrum" as the Maestro puts it.
Long term rates went up for a little while after the Great Manipulator said that, but they have since come back down.
What a shame. The government is having trouble manipulating the markets.
I think it's because our prospects of importing even more deflation in the future keeps getting greater. The dollar should keep strengthening and that's going to make imported goods even cheaper.
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