The economy is really sick:
Today's CPI report signals deflation, or a prolonged price
slide, may become another hazard facing Federal Reserve Chairman
Ben S. Bernanke and President-elect Barack Obama. Deflation
could worsen the economic downturn by making debts harder to pay
off and countering the impact of Fed interest-rate cuts.
``The economy's really just in horrific shape,'' said
Joseph LaVorgna, chief U.S. economist at Deutsche Bank
Securities in New York. Fed officials will ``take rates as low
as they have to'' to avoid ``a deflation-type scenario, which
now all of a sudden is very possible.''
LaVorgna predicts the Fed will cut its main rate to 0.5
percent from its current 1 percent when it meets on Dec. 16.
Fed Vice Chairman Donald Kohn said today that while the
risk of deflation is ``still small,'' policy makers must be
``aggressive'' in fighting the danger. The economy ``is
declining right now'' and will record a couple of quarters of
contraction, he said in answering questions after a speech in
Fed policy makers last month forecast the U.S. economy will
contract through the middle of 2009, with some officials
prepared to cut interest rates further in response, according to
a record of the group's meeting.
If the Fed's thinking of cutting rates further, why aren't mortgage rates going down?
I think it's because the Fed has done all it can do. Future rate cuts
are like that eighth scotch. Drinking that eighth scotch isn't going
to make you feel any better than the seven prior. It just might make
you feel worse.
I advised folks, right after the election, to lock loans with rates under 6% if they were closing within 30 days.
Today, I"m suggesting that you lock any loan that is closing this
year. Today, a 45-day lock for a 6.0% rate would costs 1.25%. While
you may see rates drop below 6% , in the next 45 days, the risk of them
moving higher is greater.
Take 6% and run.