Mortgage Economist Predicts 3rd Interest Rate Cut This Year

The next Federal Open Market Committee (FOMC) meeting of the Federal Reserve will take place on Tuesday, Dec. 11. LendingTree Loans Chief Economist Jim Svinth forecasts a rate decrease of 50 basis points, which is the third interest rate cut for 2007.

Svinth says, "Given the slow motion decline of the housing and financial markets, the Fed will in all likelihood drop the target Fed Funds rate by .50% at the December 11 meeting."

Svinth adds, "The ramifications to the domestic and global economies if the FOMC were to do nothing at next week's meeting are huge. In the same vain, lowering rates by only .25% is simply not enough. Recent comments made by Fed members indicate they understand the current risks and therefore will take further action on Tuesday with a drop of .50%."

A rate cut on Dec. 11 will be the third rate cut for the FOMC following a pause campaign that has been in effect since August 8, 2006.

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Conference Board: U.S. Economy Will Benefit from Higher Bond Yields, Wage Increases, Rise in Short-Term Interest Rates

The Conference Board says that after a very long wait, long-term Treasury bond yields have begun to reflect a better outlook for the U.S. economy and the prospect that the next move in the federal funds rate will be up.

The forecast also shows a rise in short-term interest rates by 50 basis points in the second half of this year.

Manufacturing production is rising at about a 2% annual rate. Nondefense capital goods orders, a key investment indicator, have risen 20% in real terms since January. Much of the rest of the gain is in machinery orders. Although the pickup in orders is fairly broad-based, high-tech orders are somewhat lagging. High-tech orders, which should recover in the second quarter, are so closely related to the overall level of investment that it would be surprising if this sector didn't begin to rebound soon as well.

"The picture is a little less encouraging on the housing front," says Gail Fosler, executive vice president and chief economist of The Conference Board. Her analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board's global business network. "But progress is underway. Demand is slowly coming back to the market. Mortgage applications are up about 17% since the low point last August. And the drop in housing starts has been so sudden and dramatic that it has taken inventories down to close to historic averages-though still far above the levels common during the past 10 years."

But housing is a sector in which long-term forces are shaping the outlook as well as short-term cyclical events. The housing market has enjoyed a decade of strong (booming since 2000) conditions. The strength in housing received not inconsequential help from a long-term trend to lower mortgage rates, which have helped to offset higher housing prices to a great degree.

As a result, the "housing affordability index" has remained high and within a remarkably narrow range of about 120 to 140 since 1993. (An index reading of 100 means that a family earning the median income has enough money to qualify for a mortgage on a median-priced home assuming a down payment of 20%). Beginning in 2004, housing affordability began to plummet as both mortgage rates and house prices rose. The current reading is about 110, which given the definition of the index would not seem to be that low. But the reading is one of the lowest since 1990.

"This weakness in the U.S. housing market is not just a cyclical phenomenon but a response to some very important long-term trends," says Fosler. "Home prices outpaced average incomes, so there would be a downward bias in any event. As mortgage rates rise, the downward pressure on prices will persist. A surge in wages could solve this problem, but rapid
increases in wages would create other problems like inflation that the Federal Reserve would have to address with higher interest rates. While housing is not likely to be a drag on the U.S. economy in the second half of 2007 and 2008, it is also unlikely to make much of a positive
contribution for the foreseeable future."

Consumer spending has certainly been buffeted by slower housing prices and higher gasoline prices. The stabilizing force has been the tight labor market and rising wages. Earnings have slowed, but as in the last cycle, wages will begin to pick up again as growth accelerates and the unemployment rate remains low. Real wage and salary income has been growing at a 2% to 4% annual rate -- with ups and downs due largely to the ebb and flow of gasoline prices. The inflation-adjusted growth of consumer spending has remained generally in the 3% to 4% range since 2003. But retail activity has been hard hit by the housing slowdown. These trends explain why the retail sector and particularly the home-improvement retailers have been under so much pressure.

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Get Only The Best Credit Cards For You

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Credit card companies are picky about who they approve for their credit. Shouldn't you start being just as choosy about which cards you apply for and carry?

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