Wednesday, February 27, 2008

Mortgages, the Fed and the Macroeconomy

Here is a fun picture: the graph on the right is a chart of national mortgage rates for 5 year adjustable loans and the graph on the left is the same but for 30 fixed loans. Notice something funny? They start in about the same place in November 2007, moved very similarly until the end of January (exactly when the fed did its two big cuts in the target federal funds rate), but then have diverged radically. I posted about this before, but the situation has really intensified in the last couple of weeks - we are getting close to an almost 1% point difference in the two. While the fed can manipulate short term interest rates through the money supply, they cannot do the same with long term rates. The mortgage industry is clearly very worried about the inflationary effects of increasing the money supply. It is not at all clear to me where this will end, but it certainly does not help the housing sector to recover.

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