Wednesday, June 14, 2006

Earth to FED: Your Love is Like Bad Medicine

I just watched the NewsHour with Jim Lehrer on PBS (FNO= For Nerds Only) and there was a great discussion concerning the expected and upcoming increase in the feds fund rate to 5.25%... and its affect on certain business sectors, consumer prices and wages. This is a key short term interest rate pegged to the type of borrowing that business needs. The discussion was centered aroung inflationary pressures growing due to high energy costs. Business will sooner or later have to pass that cost onto the consumer and... BAM! Inflation!

Now, I'm paraphrasing a CNN Money article, but the interest rate hikes is "medicine" combating expected inflation comin' around the mountain. This is good. Some economists feel that these hikes, if another were to happen, is too much medicine... and we've all been over medicated. Right? This is bad.

Anyway, the Brookings Institute's Alice Rivlin on Jim Lehrer's show seemed to agree that we should see a a bit of an economic slow down, less inflationary pressures than the doomsdayers think (although there is room for some inflation... just not a huge endless jump), and therefore, the FED can back off a little on the rate increases. Let's hope so.

Why are the FED's short term rates important to home owners and their mortgages?
Well, they are very important if you have an ARM (adjustable rate mortgage) or adjustable home equity loan... these short term rate hikes will directly effect the interest on the ARM and HELOC. FED raises these rates, your ARM will raise (get it? raise your real arm way up to grab your new interest rate on your mortgage).

I have an ARM, (two of em'!... be here all night folks, shows at 10PM and 12 Midnight) and HELOC, so I watch this stuff like anyone else. No matter if it seriously effects your bottom line or not, I thinks it's a good idea to curb certain behaviors in light of these hikes... maybe start bringing that sack lunch again.

While some feel the short term rate will hit 6% by the end of the year. But many don't. Me included. But if your not a gambler like me, than you may want to save a larger down payment and get into a 30 year fixed.

The CNN article also suggests there is a camp that feels the FED has been too conservative and already has dished out too much medicine that can tip the econmy into depression... where everyone dumps out of borrowing and business investment.

Bottom line? You're gonna need somewhere to live, and interest rates will also affect other consumer costs (some discretionary spending), so you might as well pay yourself first by buying a place. Try to buy a place that is within your means... so if its' a one bedroom with parking you can afford, rather than two bedroom that stretches you, get the one bedroom and be creative with the space. It beats renting big time and you can always cut out other luxuries in the lean times.

Man, am I glad I took those economics classes in college.

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