Economic Factors this Week:

Mortgage bond prices rose last week pushing mortgage interest rates lower. Trading remained volatile with wild swings in both stocks and bonds. The Treasury auction of 3 and 10-year bonds was met with reasonable demand helping to support the overall interest rate markets. The economic data released was within the estimated range and indicated the US economy continues to weaken. For the week, interest rates on government and conventional loans fell by about 3/8 of a discount point.
The meeting on Tuesday of the Federal Open Market Committee will be the most important event this week. Look for rates to be potentially volatile Monday as traders position themselves ahead of Tuesday's meeting.

Industrial Production

Monday, Dec. 15, 2008

Consensus Estimate: Down 0.5%

Analysis: Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.

Capacity Utilization

Monday, Dec. 15, 2008

Consensus Estimate: 75.9%

Analysis: Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.

Consumer Price Index

Tuesday, Dec. 16, 2008

Consensus Estimate: Down 1.3%, Core up 0.1%

Analysis: Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.

Housing Starts

Tuesday, Dec. 16, 2008

Consensus Estimate: Down 7.7%

Analysis: Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates.

Fed Meeting Adjourns

Tuesday, Dec. 16, 2008

Consensus Estimate: 75 basis point cut

Analysis: Important. Most expect the Fed to cut rates. Volatility will likely surround the adjournment of this meeting.

Leading Economic Indicators

Thursday, Dec. 18, 2008

Consensus Estimate: Down 0.5%

Analysis: Important. An indication of future economic activity. Weakness may lead to lower rates.

Philadelphia Fed Survey

Thursday, Dec. 18, 2008

Consensus Estimate: None

Analysis: Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

Fed Meeting

The United States central bank, the Federal Reserve, coordinates the borrowing and lending activities of federally chartered banks. The principal reason the Federal Reserve was created was to reduce severe financial crises. One way of accomplishing this goal is to control the amount of money that flows through the economy. By manipulating the US money supply, the Fed influences inflation, unemployment, and the level of US economic activity. The Fed has a variety of tools that it uses to control the money supply, but its chief policy tool is the manipulation of short-term interest rates.

All eyes will be focused on the Fed meeting Tuesday. Most analysts predict another rate cut as the economy continues to struggle. As of trading late last week, futures contracts showed a greater than 80% chance of a 75 basis point cut.

Keep in mind that a Fed rate cut does not automatically mean mortgage interest rates will improve. The Federal Reserve has direct control over the level of short-term interest rates. The Fed's influence over longer-term interest rates with rate cuts is less certain. However, the unprecedented recent direct purchasing of mortgage bonds is a strong effort to push longer-term rates lower as well.

Remember, rates are historically favorable. While there is a strong possibility rates could improve, there are no guarantees in these uncertain times. As a reminder, just a few months ago analysts overwhelmingly predicted gas prices would continue to rise. Conditions can change quickly.