Interest Rates 2008

The Federal Reserve has lowered their benchmark interest rates 75 points in 2007 while publicly stating it remains inflation-vigilant. The futures market, where contracts are traded based on the future value of the Federal Funds Rate, is currently discounting in another 75 ppint rate cut between now and the summer of 2008. Online banks who largely ignored the first rate cut by the Fed in the summer of 2007 have now nearly all lowered their deposit rates on checking, money market, CD, and savings accounts. This growing consensus that short-term interest rates are heading lower in 2008 does not necessarily mean that longer rate will also be lower. Many economists believe that the spread between short and long rates will widen. Investors used to seeing little incentive to buying a CD or Treasury with longer than a six month maturity may finally see in 2008 a significant difference between the rates offered on mutual fund money markets or bank money markets and the yield offered on mid-term and long-bond funds and CDS.



The other by-product of an environment in which short-term rates are falling and longer term rates increasing is the impact on mortgage rates. Variable rate mortgages, especially those indexed to the prime rate, may have falling rates which will surely help the American consumer, while fixed-rate mortgages may increase in rate. Homeowners need to fully understand to which index is used as a benchmark for their mortgage because the LIBOR rate, Treasury yields, and the Prime Rate do not move in tandem and each index has a different forecast.

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