Thursday, October 26, 2006

Fed won't raise interest rates soon

Yesterday, Fed decided to leave the interest rates at 5.25%. Picture of inflation is still unclear. On 10/17/06, Labor department announced that the Producer Price Index for finished goods fell by 1.3% in September. Much of this was driven by the drop in energy prices -- this may change if OPEC screws up. Core wholesale prices went up by 0.6% mainly because of recovery in the cars and light trucks business. It looks like inflation is still under control. Housing market is collapsed but commercial real estate is still going strong. Economy is not too hot or too cold. There is no alarm to increase the interest rates. Some guys in wall street argue that Fed would decrease rates before the end of the year. You wish! I think Fed won't touch the interest rates until Jan 2007.

If the interest rate is stable, or atlest when the market thinks like that, that is the time to make money!

2 comments:

AKT said...

It’s very clear from ‘Fedspeak’ of the past few months that the focus is on containing inflation, even at the cost of a continued economic slowdown. Given current trends in inflation, I agree that the Fed is not going to touch the rates for the next couple of months. But I believe the end of the ‘wait and watch’ policy is going to be a softening bias and no further tightening. Once inflation stabilises within the ‘comfort zone’, the focus will shift again on spurring the economic activity.

Bharathi said...

5.25% is still low, this is really sufficient for economy to grow further. But, the market is afraid that housing bubble bursting may be really bad. I don't see that happening. U.S. Real estate prices are still crazy, there is no bidding wars, but the price hasn't come down sharply. Moreover, oil price is getting stable. Economy is growing ok as such.

If there is a geo political problem or some election twist, there may be some effect to interest rate. Otherwise, I don't see the rate is coming down in Jan. I really hope not, I am tired of seeing $700,000 for 2BR houses.

I personally want real estate to crash. But, as an investor I would like to see soft landing as it is happening right now.