April 3 2006

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For the week of Apr 03, 2006 --- Vol. 4, Issue 14

Last Week in Review

HELICOPTER BEN, PRINTING PRESS BEN, BIG SWINGING BEN...He's been called many names, but Federal Reserve Chairman Ben Bernanke probably disliked being called an "inflation wimp" the most. So Chairman Bernanke came out on Tuesday and flexed some muscle against inflation, hiking the Fed Funds Rate another .25% last Tuesday. So what? So if you have a home equity line of credit, your rate just went up. Your credit cards and other adjustable rate debts will likely follow shortly. Why would a nice guy like Chairman Bernanke do this to you? It's like having to give your child a spoonful of bad tasting medicine - it's tough to swallow initially, but is done with the intent of fixing a larger problem. The Fed is charged with the responsibility for controlling inflation - where prices for the goods and services we all purchase run rampantly too high - and hiking the borrowing rates help to slow down the pace of inflation. But in his Policy Statement, he indicated that there were still some inflationary concerns in the wind, and the hikes may not be over just yet. The financial markets despise uncertainty, and Mortgage Bonds declined over the course of the week, causing home loan rates to increase by about .125%. EVERYONE SEEMS TO BE TALKING ABOUT "THE FED"...SOUNDS A BIT MYSTERIOUS AND IMPOSING...SO WHAT'S THEIR STORY? WHAT DO THEY DO AND WHERE DO THEY DO IT? ARE THERE ANY SECRET HANDSHAKES INVOLVED? DON'T MISS THIS WEEK'S MORTGAGE MARKET VIEW, WHERE YOU CAN BRUSH UP YOUR WORKING KNOWLEDGE OF THE FED.

Forecast for the Week

So after a bit of a rough week past, what can we expect for the week ahead? The biggest news item waiting in the wings is the Jobs Report, which indicates the number of new jobs created during the previous month. The Jobs Report tends to be a very heavy hitter in the markets, but why? Well, common sense would indicate that if the job market is healthy - the economy will continue to be healthy. It means employers are doing well enough to expand operations and hire more people. And when you hire, you generally have to hire someone away from a job they already hold. To entice that person to come to work for you, will you offer less pay? Of course not...you'll offer a pay increase. In turn, this enables the employee to have more spendable income to inject into the economy, in the form of buying more goods and services, perhaps even a bigger home, nicer car...so it's easy to see why the Jobs number is a big one to watch! But we know that good economic news like a super hot Jobs number tends to be good for Stocks, but the inflationary pressures will pull money away from Bonds, causing pricing to worsen and home loan rates to rise. Alternatively, if the number comes in far short of expectations, investors would tend to pull money away from Stocks and put them into Bonds, which would help home loan rates to improve. Friday morning will tell the tale - 198,000 new jobs are expected, so will it be a hit or miss? We'll all have to wait and see. The chart below indicates how Mortgage Bond pricing has been bouncing around in recent months, and appears primed for some improvement. Friday's highly anticipated Jobs number will likely dictate the next course of direction for Bonds and home loan rates. Chart: Fannie Mae 6.0% Mortgage Bond (Friday Mar 31, 2006)

The Mortgage Market View...

So let's talk Fed. Since the reins were recently passed from long-time Fed Chairman Alan Greenspan to new Fed Chair Ben Bernanke, more focus has been directed at this institution of late. Let's look at some of the facts, and understand exactly what they do and how they do it. The Federal Reserve System was created on December 23, 1913 by President Woodrow Wilson, to act as the central bank of the United States. It was created to provide the nation with a safer, more flexible, and more stable monetary, banking and financial system. The Federal Reserve System is made up of twelve Federal Reserve Banks, overseen by the Board of Governors. The Federal Reserve Board of Governors is located in Washington DC, and is comprised of just seven members, who are appointed by the President and confirmed by the Senate. The full term of each member of the Board of Governors is 14 years, and the appointments are staggered such that one term expires on each even-numbered year. This system ensures that "fresh blood" will be brought to the Board every two years. But when your term is up as a Board Governor, you are done, and cannot be reappointed...but if a member leaves the Board before his or her term expires, the person appointed to fill the remainder of the term can be reappointed for another full term. The terms for the Chairman and Vice Chairman are four years, but may be reappointed for additional four year terms. The current Chairman, Ben Bernanke, and Vice Chairman, Roger Ferguson, lead the Board of Governors. So what do they do on a daily basis? Let's take a look. The main responsibilities of the Fed include: Researching US national and regional economies Providing financial services to depository institutions, the US government, and foreign official institutions Supervising and regulating banking institutions to ensure the safety of the nation's financial system and protect the credit rights of consumers Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy (i.e. hiking or cutting the Fed Funds Rate, as they did recently) in pursuit of maximum employment, stable prices, and moderate long-term interest rates Communicating information about the economy via publications, speeches, seminars and websites One terrific website can be found at www.federalreserve.gov/kids, which gives a very simple overview of the Fed and what they do, including a great definition of inflation that any small child can understand. But the communication method that typically grabs the attention of most individuals is the statement given by Federal Chairman Ben Bernanke, following the eight formal meetings that take place about every six weeks throughout the year. At these meetings, the Fed has the opportunity to make changes to the Federal Funds Rate, and make their decision by reviewing economic and financial conditions. They can also make adjustments to the Fed Funds Rate outside of these meetings, but are hesitant to do so, as they would be delivering a surprise which can rattle the financial markets. Their charge is to keep the economy growing at a steady pace by keeping inflation stable and rates moderate. When inflation is low and stable, businesses and households can spend, knowing that their purchasing power can remain strong. Unfortunately, there are no secret handshakes involved, no special hats worn during meetings, no passwords required for admittance to the Board room. But they still remain an interesting group, with a level of responsibility to the US, our financial system and our economy that is probably matched only by the President himself.

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Economic Calendar for the Week of April 03 – April 07 Date ET Economic Report For Estimate Actual Prior Impact

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.

As your trusted advisor, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.