Inflation Will Decide Whether Fed Hikes Rates

This article from the Wall Street Journal is a warning for home buyers to make a move now. As it appears the low interest rates may not remain low in 2007. Here is the article for your edification . . .

The Federal Reserve is expected to leave target interest rates unchanged at its meeting on Tuesday, fueling hopes that it will start cutting rates some time next year.

However, there's uncertainty over when rates would be cut and by how much. Fed Chairman Ben Bernanke, who's been open about his plans for interest rates, hasn't talked about the kinds of rate cuts that many investors are banking on.

Futures traders had been betting that the Fed would start cutting rates at its March meeting, but high employment rates have caused them to extend that prediction to May.

By June, futures trading indicates, the market thinks the Fed will have cut rates at least once, maybe twice. But Bernanke said in a speech two weeks ago that the question facing the Fed isn't whether to cut rates, it is whether to raise them to fight inflation. After all, "core" inflation, not counting volatile food and energy prices, remains higher than the 2 percent a year that the Fed is willing to tolerate.

If inflation keeps moderating over the next few months and pulls back toward the 2 percent level, then the interest rate cuts may happen. But if inflation proves sticky and stops pulling back, the Fed could be forced to cool it off by raising rates.

"Inflation is the key here," says Ethan Harris, chief U.S. economist at Lehman Brothers. "If you get serious inflation, if the Fed's fears materialize, then you will have the Fed hiking instead of cutting."

Source: The Wall Street Journal, E.S. Browning (12/11/2006)