Andy Policano, dean of UCI’s Merage School of Business, said the Federal Reserve might have to raise interest rates in the latter part of 2008 to quell inflationary pressures.
Policano, an economist, spoke Thursday at the Merage School’s business outlook conference organized with the Irvine Chamber of Commerce.
The Fed has cut key interest rates twice in the past two months, including a three-quarter point cut in the federal funds rate this week. The moves are intended to spur lending and bolster the economy, but it typically takes six to nine months for such actions to have an impact on spending, Policano said.
In the meantime, inflationary pressures could grow. The Fed is going to have a tougher time managing the tradeoff between growth and inflation than in the past, because of a shift in wealth to overseas markets and because the demand for scarce resources like oil, copper and steel is growing faster than the supply, Policano said.
Turning to mortgages, Policano said now is a good time to consider locking in a fixed rate on a home loan.
Since 1984, it hasn’t been a good decision to choose a fixed rate over an adjustable-rate mortgage, because interest rates have generally been declining, he said. “We may soon be in a different environment,” he said.
With the gap between a 30-year fixed (5.5%) and a 5-year ARM (5.0%) having narrowed to half a percentage point, it makes sense to look at a fixed rate if you plan to own your home for a prolonged period, he said. (Note: Some brokers were quoting 30-year fixed conforming rates at 5% to 5.25% earlier this week.)
Raising rate at the end of 2008 and the $417 loan limit will be back on Dec 31, 2008. So why buy a $700000 home when you know it not going to be worth that much 11 months from now.
Every time I see Henry Paulson speaking about how to help the home owner, I just want to punch him in the face. He knew the housing was going to crash that how him and all his budies made billions of dollars shorting morgage secrurities at Goldman Sach.
I question the legality of raising the FHA jumbo limit in some areas and not others. Why should a $600,000 mortgage in OC be $4000 a year cheaper than one in Chicago or Houston. Were I a builder or a realtor in areas not receiving this Federal subsidy I’d be hopping mad.
Maybe even in court.
Then there are areas like Washington, D.C. whose suburbs run out to the very edges of those from Baltimore, Md. and Richmond, Virginia. Only the homes in the Washington, D.C. area will be eligible for the discount jumbo mortgages but homes 10 or 20 miles away deemed to be in the Richmond or Baltimore region will not.
the fed is pretty much powerless nowaday.
Building material and construction cost is on the rise and in most areas the value of decent real estate is above 600K. Now what I really don’t understand is that 5.5 or 5.0 percent is still very high. My bank pays me much lower interest for all the money I deposit and they use to loan other people. Where is the justice here? why do I have to pay more when I borrow the money and get paid less when the bank is taking my money and using it to loan others?
I don’t understand how raising rates will produce more “scarce resources” that are presumably causing inflation to rise.
Inflation is a monetary phenomenon. And if it’s not, then using monetary policy to target inflation won’t work anyhow.
Raising or lowering rates does nothing to make more oil, for example. It only changes the costs of borrowing and the value of the dollar.
Matt, could you please go back to the article you did when you interviewed me regarding this very subject? I am pretty sure I said rates are way too low and that they MUST go up in 08, to the 8% range! I only needed 30 years and a Masters Degree to figure it out!
Lou Pacific
Real Estate and Mortgage Company Consultant
Serving OC for 30 Years
I kind of like lou’s comment. Once the elections are over the party is over. The new guy or gal will have to deal with the mess.
Lou, I didn’t forget. You were royally roasted for it.
If rates go to 8% - the trip to the bottom will make the 25-30% seen in all but Beach Cities look small by comparision.