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How well do we know the Fed?
September 18, 2007
Well, today may seem like judgement day for all of the lenders and borrowers that are sitting with loans in trouble. If the Federal Open Market Committee (FOMC or Fed) cuts the Fed Funds rate (the rate that banks charge each other for overnight loans) by .50%, many will see that as an effort by the Fed to bail out those who have made bad mortgage decisions. On the other hand, this should also drop the Prime Rate by .50%, making those of us with Home Equity Loans a little more comfortable.

A .25% rate cut would seem to be more in line with Fed Chairman Bernanke's liking. He is an inflation hawk and he believes that inflation is still a real concern. This morning's PPI (Producer Price Index) number dropped more than anticipated, making some think that inflation is no longer an issue. This was due to the drop in August of food and energy costs. It is believed that the Fed will ignore this number due to the fact that energy costs have risen since the data was compiled.

Although a .50% rate cut would please me the most, I personally believe that the cut will be .25%, although I won't be too surprised it Bernanke chooses to stand pat.

SHOULD I LOCK OR FLOAT?
A 30 year fixed mortgage between 6.0% and 6.5% is still a great rate. I do believe, however, that the days of 30 year fixed rates at 5.00% are a thing of the past. Unless you are incredibly comfortable with interest rate risk, lock your rate. Your degree of happiness at saving an 1/8 of a percent will be far outweighed by your degree of unhappiness if you lose that 1/8 of a percent!

Brett Wolf
Loan Officer





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