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Looking Back And Looking Ahead : February 25, 2008

It's a big week for mortgage markets (again) and that should cause rates to fluctuate wildly (again). 

The volatility we've seen since December has not been for the faint of heart.  Even this past Friday, as mortgage rates were poised to end the week lower, a late-afternoon stock market rally reversed it. 

In the last 45 minutes of trading, the Dow Jones Industrial Average swung 225 points.  Mortgage rates rose, too, peeving Americans who planned to go house-hunting over the weekend.

This week, mortgage rates will take direction from a handful of economic reports including the Federal Reserve's preferred inflation marker -- the Personal Consumption Expenditures report.  PCE is a Cost of Living index.

The biggest story, though, is Fed Chairman Ben Bernanke's Wednesday testimony to Congress.

While he's not expected to say "the economy is in a recession", or "the economy is doing just fine", markets expect Bernanke to give guidance about how far the Fed would cut the Fed Funds Rate to stimulate the economy.

The Fed Chairman won't say outright, "The Federal Reserve intends to lower the Fed Funds Rate to 1.000%".  Therefore, it will be the guessing of how low the Fed will go that should cause markets to buck.

But remember: Cuts to the Fed Funds Rate do not necessarily lead to lower mortgage rates.  To the contrary: Since the Fed started cutting the Fed Funds Rate in 2008, mortgage rates have moved higher.  As they cut, though, ARM interest rates should become more attractive versus fixed-rate mortgage rates. 

This is because additional cuts the Fed Funds Rate will fan inflation fires longer-term and inflation erodes the value of long-term mortgage bonds.

(Image courtesy: West Linn Tidings)