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Some Experts Believe the Fed Would Be Shut Down If Audited… What This Means To You

Updated on June 11, 2009

Maybe you’ve been sitting on the sidelines wondering whether or not now is the right time to get a new home mortgage. Maybe you’re considering buying a new home or perhaps you just want to refinance your existing mortgage to get a lower rate or to move from an adjustable rate to a more comfortable fixed rate mortgage. Honesty, it really doesn’t matter what the reason; the question is whether or not you should act sooner or later. Should you get a mortgage today or wait to see if rates come back down?

What is the current trend?
The trend is NOT your friend at the moment. If you’ve been watching mortgage rates at all lately, you’ve seen rates on a tear and it’s been pretty much straight up. Normally you see rates bounce around a bit, but since the super low rates of April and May, the ‘bouncing’ has been all one direction; UP!

What is the current state of the Fed?

The Fed, responsible for setting the base Fed funds rate on which other interest rates or more or less tied to, isn’t sitting so pretty these days. According to one expert, Mr. Jim Grant who spoke with CNBC, the Fed is undercapitalized in much the same way Citigroup, well known for being in serious financial trouble, is undercapitalized. In fact, the Fed has $45 billion in capital yet holds $2.1 trillion in assets.

According to Mr. Grant, if the Fed were to apply its own auditing methods to its own books, they would shut themselves down in a heartbeat. Not terribly reassuring, to say the least.

What do market experts think?
Mr. Grant went on to say that he is not a fan of the way the Fed has handled interest rates to this point. He thinks holding rates at or near zero (it is currently at .25%) is a mistake. Grant doesn’t just think it’s a mistake for the US economy, he feels that is a bad idea for any economy. He compares interest rates to traffic signals, and says that having a rate of (essentially) zero is like setting all the traffic signals to green. I’ll let you imagine the outcome of that scenario.

What do others believe will happen to interest rates?

Mr. Grant is not alone in believing that such low interest rates are a bad idea and will not be able to stay there much longer. If you look at the Fed funds futures, which is an indication of where the experts expect rates to be in the near future, you can see that they have already priced in an increase of a half a percent. In other words, while it hasn’t been done yet, the ‘experts’ feel it is as good as done.

How does this affect you decision to get a mortgage or not?
If it looks like a duck, sounds like a duck and acts like a duck… it’s probably a duck. In other words, all indications are that rates will be going up from here. Is that absolute? Of course not; nothing is. Will there be some dips down along the way? Most likely. But where and when that will happen is difficult… more like impossible, for anyone to say. In the mean time, while waiting for the next dip, rates continue to go up and up and up.

If you have made up your mind that a mortgage refinance makes good financial sense for you at today’s rates, you should act now. If you have decided to buy a home and you need a mortgage, you should act now. If you were just looking to save a few bucks every month because rates were exceptionally low, run the numbers and see if it makes sense for you. If it was close a month ago, it probably doesn’t make sense for you to do it now.


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