Bubble, Inflation, Fed, Recession

To get a handle on where the economy is headed exactly is nearly impossible. I am always amazed at the volume of data available and the number of analysts who all look at the same data and come up with wildly different projections.

Today's Consumer Price Index (CPI) came in showing inflation growth a little higher than the market expected, and the bond market is having a fit over it. This all but guarantees another Fed rate hike for the end of June, and the bond market is adjusting to this ahead of time.

Many economists seem to feel that the Fed historically goes too far when tightening rates, and many believe that we could wind up in a mild recession by the end of the year or early 2007 if they push it any further. Financial markets were clinging to the idea that the Fed would go on 'pause' as of the last rate hike, but today's news is changing the outlook. Ben Bernanke has to be aware that inflation is a lagging indicator, and today's news reflects 6-24 months ago's economy, but as the new chairman, he also faces political pressure to appear vigilant in fighting inflation, hence the expectation of another adjustment.

What this means is, if you are going to do something soon, you might consider locking in pricing before it gets any worse. However, I would be hesitant to pay too much up-front for the transaction, since a sputtering economy means that rates should come down again in the next few quarters. If today's refinance objective is to consolidate debt and lower payments, then don't wait. But if the Fed goes too far, the odds increase that you may find an opportunity to obtain better rates & terms in the coming months.

If you have questions about how to navigate this market, and make mortgage decisions right now, or about what this chart above means exactly, please email me.

* Graphic courtesy of Mortgage Market Guide