Fed Likely to Leave Rates Unchanged

Mortgage Market

Federal Reserve Chairman Ben Bernanke has been busy focusing on the mortgage market. Bernanke has spent a lot of time caucusing with other top US economic and banking leadership sorting out options for a still crashing mortgage market.

Mortgage rates, a key ingredient in stabilizing housing prices, had been stubborning resisting Fed interest rate cuts. The market continued to heavily discount mortgage-backed securities for rising default risk. Meanwhile, Banks and lenders continued to tighten credit.

The net effect was no incentive for borrowers to buy or refinance, while banks continues to dump more foreclosures into the housing market. A vicious cycle that continues to put housing prices in a free fall.

Hope for breaking this cycle rose with the takeover of Fannie Mae and Freddie Mac by the US government last week. Immediate market reaction was relief, rallying foreign stock markets and lowering rates to five month lows.

These actions and market responses takes a pressure point off lowering the Fed funds rates.

Economy Headed Towards Recession

As mortgage market drama continues to play out the US economy continues to soften. Unemployment roles have risen to a five year high of 6.1 percent, while industrial production continues to slow.

However, the overall GDP has been getting a boost from a weaken dollar, resulting in increased export numbers. This has moderated the official declaration of recession--although Americans are feeling recession-like pinches.

The balance in recessionary indicators again take pressure off of the Fed to use their rate actions to ease these burdens. However, there is discussion and support for leaving rates as is to give opportunity for an additional rate cut later in the year to jump start stagnation.

Inflation Muted?

One of the top concerns at the August Fed meeting were mounting inflationary pressures. Steep increases in energy and food prices, with moderate rises in other consumer goods brought inflation to the top of agenda. However, oil prices have receded from $145 a barrel to near $100 on Friday--sending signals inflation may be taking a break.

Again, giving the Federal Reserve the opportunity to take the hands off the economic steering wheel and give free markets a little more time to work things out.

Expectations are that the Fed will stay put at 2 percent, hold in reserve a rate cut for later troubles or a rate increase to head offre-surging inflation.