It's a big day in the economy as all eyes turn toward the Federal Open Market Committee meeting, where it is widely expected by many economists that the Federal Reserve will keep short-term lending rates the same, at 5.25 percent.
LendingTree's Chief Economist Jim Svinth believes that the Fed will pause interest rate hikes for the eighth straight meeting since June 2005 when it started raising short-term interest rates.
"The Fed is stuck in neutral and will likely keep the Fed Funds target at 5.25 percent at their next meeting," says Mr. Svinth. "The two driving variables right now are the domestic housing market and global inflation risk. The FOMC will continue to watch both of these indicators closely to see which one tips the scale before a rate change is made."
Short-term interest rates, the rates at which lenders borrow money to loan to consumers at a higher rate, have stayed the same since August 8, 2006.
Many feel that housing has just tipped the scale. The National Association of Realtors has predicted that 2007 will be the first year since the Great Depression that home prices will fall year-over-year.
What's scaring Wall Street and Main Street is that loans held by prime borrowers entered foreclosure at record paces in the first-quarter
Countrywide, the nation's largest lender participates in one-fifth of mortgages. With the company's announcement that it would miss quarterly earnings targets for the third quarter in a row due to widening defaults, stricter lending standards, and the refusal of institutional investors to buy securities packages backed by higher risk home loans, cash and liquidity are beginning to dry up.
Soon to follow was the news that the nation's tenth largest lender, American Home Mortgage Investment Corp. closed most operations, laid off 7,000 employees and filed bankruptcy yesterday.
The negative climate is causing some, including Countrywide, to change their predictions of a housing turnaround from 2008 to 2009. With prices continuing to fall, buyers are reluctant to step in without more incentive. Inventories are still swollen in both new and existing homes.
Falling interest rates could do the trick without the Fed lifting a finger. Mortgage interest rates are already drifting downward.
Judging from the nearly 300-point rally of the Dow Industrials, investors are betting that short-term interest rates will be lowered, or that they at least won't be raised. Either is good for mortgage interest rates to remain low.
