Will interest rates continue to rise?

February 1, 2006

Greenspan’s last act was to raise interest rates to 4.5%, and state that further tightening “may be needed”, a declaration that rates will not be raised as regularly going forward.

What It Means:

Greenspan's action was supported by a low U.S. GDP growth rate in Q4 2005 of only 1.1%, compared to the expected 3%. While the low growth rate was blamed on Hurrican Katrina and the end of Q3 car incentives, there is no indication that growth willl return to 3 - 4% levels for Q1 2006. This is especially true in light of declining housing sales and lower prices. With growth potentially slowing, and inflation not as high a risk, it is unlikely that the Fed will continue to raise rates at its next couple of meetings.

Action Steps:
Short term rates are the basis for interest only and adjustable rate mortgages, as well as credit card debt. So, if you are considering a new mortgage, you can breathe a little before rushing into anything. With housing prices falling, now would be a good time to sit tight before making any changes on the home front.