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Fed Expected to Hold Low Interest Rates

Jan 28, 1:47 AM (ET)


WASHINGTON (AP) - Jobseekers still find it difficult to get work and businesses aren't yet firing on all cylinders, leading economists to predict that the Federal Reserve will hold short-term interest rates at super-low levels in the months ahead.

With inflation under wraps even as the economy has gained momentum, the Federal Reserve has leeway to stay its monetary policy course, analysts said.

"The state of the economy is strong to robust. The one question mark remaining in the economy is the labor market," said Tim O'Neill, chief economist at BMO Financial Group.

The nation's payrolls grew by a minuscule 1,000 in December, raising new concerns about the fragile state of the labor market. The unemployment rate dipped to 5.7 percent, but that was mainly because thousands of prospective workers gave up looking.

The economy has lost 2.3 million jobs since President Bush took office in January 2001. The president believes a stronger economy will lead to more jobs. Democrats point to the job losses as evidence of what they say are the president's failed economic policies.

O'Neill and some other analysts are hopeful stronger job growth will take place later this year as businesses feel more confident in the economy and see their bottom lines improve.

Against that backdrop, economists widely expect Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets interest-rate policy in the United States - to hold the federal funds rates steady at a 45-year low of 1 percent at the end of a two-day meeting Wednesday. An afternoon announcement was expected.

The funds rate- the interest that banks charge each other on overnight loans - is the Fed's primary lever to influence economic activity.

By holding the funds rate steady, consumers and businesses might have an incentive to spend and invest more, and thus boost economic growth, economists said.

If the funds rate is left alone, that means commercial banks' prime lending rate would stay at 4 percent, the lowest level in more than four decades. The prime rate is the benchmark for many short-term consumer and business loans.

Analysts also expect Fed policy-makers will retain a pledge to keep short-term rates at near rock-bottom levels for a "considerable period."

Some economists predict the Fed will leave rates alone throughout this year and into 2005. That would be good news for America's borrowers and consumer-sensitive industries such as housing, which has seen sales soar as low interest rates proved too good for many buyers to pass up.

Low rates also have put downward pressure on the value of the U.S. dollar compared with other currencies. That's been a welcome development for U.S. manufacturers because it makes their goods less expensive for foreigners to buy - something that has helped to boost U.S. exports in recent months.

Others, however, believe the Fed will begin to nudge up rates later this year.

"The Fed still has an emergency level in place when it comes to monetary policy but the emergency is no longer around," said Carl Tannenbaum, chief economist at LaSalle Bank. He predicts the Fed will bump up rates in June and again after November's elections, leaving the funds rate at around 2 percent.

The Fed cut the funds rate by one-quarter percentage point to 1 percent on June 25. In meetings after that, policy-makers have opted to leave the funds rate unchanged.

The economy grew at blistering 8.2 percent rate in the third quarter of 2003 _the strongest performance in nearly two decades. Economists believe economic growth slowed to a rate of around 4 percent to 5 percent in the final quarter of last year, which would still be brisk. The government on Friday will release its first estimate of economic growth for the fourth quarter.

Economic growth in the current quarter is projected to be solid - at a rate of just over 4 percent, economists said.

"The bottom line is that the economy is doing well. The missing piece: a full recovery of the job market," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Economists also believe Fed policy-makers will discuss ways to improve their communications with Wall Street and Main Street. The Fed appointed a working group last year to look into the matter.

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