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Looking Back And Looking Ahead : February 4, 2008

We entered the New Year uncertain of the country's economic future. With January over, it's a little more clear. 

Last week's data and events helped firm expectations. 

In the near-term, we can expect weakness:

• The economy is shedding jobs
• Consumer sentiment is low
• Home sales continue to slump nationally

In the intermediate-term, however, the picture gets fuzzy. 

The Federal Reserve has lopped 1.250% from the Fed Funds Rate in the last two weeks and those changes will work their way through the economy between now and the summer. 

If the economy reverses course and begins expanding at a steady pace, the Federal Reserve will be applauded for its moves this past month.

If the economy expands too quickly, however, inflation will set in and that will erode the value of the U.S. dollar.  The Fed will be derided for doing too much, too soon.

Inflation also causes mortgage rates to increase so it's possible that the short-term weakness put homebuyers and homeowners wanting new home loans in terrific positions.

There is no new data hitting the wires this week.  Therefore, expect mortgage markets to take their cues from external forces such as politics, oil, and the public speeches of six members of the Federal Reserve.

(Image courtesy: Wall Street Journal Online)