Federal Reserve Pauses in Their Rate Hikes

The Federal Reserve Pauses in Their Rate Hikes

Well, the two big news stories in the last few weeks were the Federal Reserve Bank's decision to not raise rates for the first time in 3 years, and the terroist plot by Islamic extremists that was foiled in Great Britain. How these two things are related helps explain why the rates on a 30 year fixed rate mortgage actually went up in the days following the Fed's announcement. Of course, the reports after the announcement that showed that inflation wasn't slowing helped spark the bond market, which naturally drove up long term rates. But what this phenomenon actually helped highlight is that although the Fed can influence rates, they can't totally control them.

One of the major problems with the Federal reserve's policy of raising rates to influence inflation is, by their own admission, that the results of rate increases aren't fully seen in the economy until 12-18 months after the increase takes effect. This means that the "best" rate to keep inflationary pressures at bay might be the Fed rate of a year and a half ago, and cuts in the current rate may be necessary to forestall a recession. Although the current rates available to consumers for a new purchase or refinance are actually quite reasonable, at only 6.5-8% (remember the 80's, when rates on mortgages ran as high as 18%!) many people have adopted a wait and see attitude when it comes to buying a new home or refinancing their current one. Thus, the huge drop in new home sales and starts, and the equally large increase in homes on the market versus buyers wanting to buy them.

The feeling among consumers seems to be that rate cuts are on the horizon, and the instability caused by the attempted terroist attacks also contributes to the instability that makes consumers balk at taking any type of risk. The fact that the pressure of increased oil costs is about the only thing fueling inflation at the moment, also doesn't help. This may lead to the Fed maintaining a higher rate than is really necessary, leading to a real estate market collapse that is both unprecedented and unwarranted. The good news is, buyers who aren't afraid of the current rates can really get some good deals on the home they want. Most buyers are afraid of "paying too much in interest" at the moment, so houses are sitting on the market for months at a time. There are bargains to be found at 10-20% below appraised value or more, and a smart buyer can take advantage of this situation. Plus, in a year or two, if rates do gradually creep down (which is my best bet on what will happen) they can then refinance at a lower rate, and still have ten of thousands of dollars in equity. Plus, as an added bonus, those borrowers in an Adjustale Rate Mortgage (ARM) at the moment, should see their rates decreasing.

Another factor that influences inflation, and then effects interest rates, is the manipulation of U.S. currency by foreign governments. Without going into too much detail, China is one of the countries currently driving up inflation in the U.S. Every time a U.S. citizen buys a product made in China, dollars are shifted to the Chinese economy, and the trade deficit with China increases. The Chinese investors then use those dollars to buy up U.S. Treasury bonds, which fuels inflation.

So, we have a variety of factors at work that cause changes in the interest rate you pay, and also cause inflation or recession to occur in the United states. Changing one of those factors, as the Fed does, can influence the others, but can never stop those factors from changing in response. Now the question is, "What can an individual do to influence how the factors that influence their day to day existence?". One thing each of us can do is something that was a catch phrase from 20-30 years ago, and that is to "Buy American". Although that is difficult to do that today, with components for the various things you might purchase being manufactured in a variety of different countries, and U.S. companies being bought out and owned by foreign conglomerates, it is a goal still worth pursuing. It would only take a small shift in consumer buying patterns to influence both the trade deficit, and the economy in the U.S. And when you cosider that the quality of American made products is still, by and large, excellent, the overall cost to consumers is actually negligable.

The other major factor in this equation that each of can control is oil. Wars with, treaties and agreements entered into, sanctions imposed against, and aid and concessions given to oil producing countries are a major source of drain on the U.S. economy. The solution to this problem is both simple and attainable. As a country, we need to stop depending on foreign oil for our energy supplies. Simply cut off all interaction with, commerce with, aid given to, immigration or political asylum allowed from, any country that supports or allows terrorist activity. The benefit to the U.S. economy would be billions of dollars in scope, and those countries could no longer complain that we were intruding on their culture or way of life. But, how could we survivie without the influx of oil from these countries? The fact is that the technology does exist, and it is available today, not at some point in the future, but it simply isn't being utilized by a governmet that has too many ties to maintaining the "status quo", when it comes to the oil industry. This technology would probably be commonplace today, except the federal government of the U.S. and the Europeon nations can't control and tax the prodution of water, so it will cost them literally billions of dollars in revenue, when it becomes the norm. This is the same reason that none of the auto manufacturers or power companies have embraced this technology.

So, what can you do? Basically, there are three things each of us can do:

1. Take advantage of the bargains now available in the housing market. Buying is always cheaper than renting, in the long run.

2. Buy American whenever you can. The few dollars more you spend will be more than made up for, in most cases, by getting a higher quality product that lasts longer.

3. Explore and promote alternatives to an oil based society, For more information on a technology that has been around for decades, and that would allow you to run your car, lawn mower, portable generator, etc. on water, not gas, check out the posting on another blog, http://www.upaas.com/blog. It can be done, and it is both cheaper and safer, and virtually non-polluting.

The conclusion I'm getting to is simple. Rates are coming down, bargains can be had, and water fueled technology is becoming available, so the future does look bright. However, you can't wait or hope that big corporations or the government will help you to take advantage of these opportunities, you have to take action yourself to succeed. Check out the posting on the blog I've listed above, and the links to the YouTube video that actually shows this technology working in a real vehicle. Consider helping yourself, the country, and the world by spending a few dollars to convert your current car over to a water based fuel system, rather than buying a new fossil fueled vehicle. The bonus is that you get to save the approximate cost of the retrofit each year for every year you own the car. Check it out.