Monday, April 27, 2009


I’ve been saying for a while that higher interest rates are inevitable (which they are).

But like trying to time the arrival of a spring storm (an appropriate analogy this morning), because you know something is coming doesn’t always mean you’ll time its arrival to the second.

Consider this: we are in the process of planting about $1 trillion of “seed money” into our economy in the form of the stimulus package. This is the biggest spending bill in the history of the country, and it works out to over $2,500 for every man, woman, and child in America.

In my opinion, once this money starts to take root, the only thing that is going to grow “for sure” are interest rates – which will be going higher.

The next Federal Reserve meeting is Wednesday, April 29.

In terms of interest rates the Fed actually controls (namely, the Federal funds rate and the discount rate), the Fed can’t cut rates any lower than they already are.

But what investors will be watching for is the language the Fed uses in its commentary about the economy.

Everyone knows rates are headed higher. What we don’t know is when it will happen, and what will trigger the upward march.

Remember that the only interest rates the Fed actually controls are short-term and "overnight" rates - the rates banks charge each other for short term borrowing to keep their cash reserve requirements in line with government mandates.

Long-term rates (30 year mortgages, for example) are a product of the market, and pricing is based upon expectations about the future performance of the economy.

If the Fed cites positive news, long-term rates will bounce up. If the Fed doesn’t paint a cheery picture, my opinion is that rates will stay where they are.

But there are very few scenarios where I could see rates falling further.

That’s why, if it was my call to make, I’d be locking my interest rate today.