The Increasing Mortgag Rate

There is concern that inflation is headed up, as a major re-construction effort is underway. Re-construction projects infuse tremendous amount of dollars into an economy, and when its the government doing the re-construction there is an inevitable impact on inflation. Not only this, but add the fact that the area devestated by the two hurricanes happen to have oil refinaries and you have a double whammy. While fundamental economic indicators remain solid, there are severe inflationary pressures and the Fed’s don’t like it.

As you know inflation is the arch-enemy of bonds. When inflation creeps up, bond investors flee, causing bond yeilds to rise. Here is an excerpt from a news story regarding the Fed response:

Dallas Federal Reserve Bank President Robert Fisher warned Tuesday inflation was nearing the high end of the Fed’s comfort zone — a clear signal that the Fed’s short term interest rate hikes would continue.

Further rate hikes would bring higher costs for consumers looking to borrow money for a car or a home. It also will make it more expensive keep an unpaid balance on a credit card.

Expectations the Fed will try to snuff out any signs of inflation prompted one Wall Street firm to revise upward its forecast for short term rates to 4-1/2 percent from 4 percent by year-end. In an analysis published hours after the ISM report, Citigroup’s Robert DiClemente said “there are hints that the (Fed’s) task now has turned to pre-empting a more tangible inflation threat.”

Hurricane Katrina not only has ravaged numerous facilities involved in the production and delivery of oil, it also promises to create supply shortages because of goods being delivered to the stricken region.

Respondents to ISM’s September survey in the utilities industry said they were “concerned with possible shortages in utility products in the near future; for example wood poles, electric wire, transformers … as they may be diverted to the states affected by the hurricane.”

From “Economy Gets Another Inflation Warning” on Yahoo! Business
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