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Fed keeps rates unchanged Bankrate.comAug. 7, 2007 By Holden Lewis Some thirsted for a rate cut from the Federal Reserve. Others hungered for soothing words about housing and mortgage markets. The central bank stuck to its limited menu of nutritious offerings.The rate-setting Federal Open Market Committee kept short-term rates unchanged. The central bank's target for the federal funds rate remains 5.25 percent, and banks will keep the prime rate at 8.25 percent. Some kinds of consumer loans, such as those for variable-rate credit cards and home equity lines of credit, have interest rates that move up and down with the prime rate. They will largely remain unchanged. Other consumer interest rates -- on mortgages, car loans, home equity loans -- are set by market forces. Those markets have been buffeted by turbulence lately, and some observers hoped for a rate cut or at least an expression of sympathy from the Fed. Central bankers have said for years that inflation is the enemy they want to defeat first. They aren't ready to declare victory. The Fed's favored measurement of inflation, called the core PCE deflator, was up 1.9 percent in the 12 months ending in June. That's within what's thought to be the Fed's comfort zone, but just barely. Now worker productivity is slowing down -- to a 1.8 percent annual rate in the second quarter -- which means that wages are rising faster than workers' output. "With labor markets tight, the most skilled workers are employed, and wage pressures are building," economist Joel Naroff says. That's nice if you're an employee, but headache-inducing if you're a central banker trying to control inflation. What mortgage bankers want While central bankers labor to limit inflation, mortgage bankers clamor for succor from the sudden shortage of credit. In the last few weeks, investors have become cautious about buying any but plain-vanilla mortgages. Rates for some types of loans have risen and underwriting standards have become stricter. Fewer people can qualify for mortgages, and that means fewer people can buy houses. Fewer buyers leads, in a roundabout way, to stricter standards, and the cycle reinforces itself. "We've got a bit of a runaway situation going," says Bob Walters, chief economist for Quicken Loans. "Common sense and rationality have gone out the window. The cops need to show up and stop the melee." The Fed's rate-setters are the cops. The day before the meeting, Walters said it would be Fed Chairman Ben Bernanke's first big test. "I'll give him the benefit of the doubt. I'll say they'll lower interest rates," Walters said. Then he added wryly, "Although I just flipped a coin when I made that prediction." Larry Goldstone, CEO of Thornburg Mortgage, worries about the cycle of tightened credit and declining home sales. "I'm not so sure a rate cut is what the market needs," he says. "But I do think that, certainly as a first step, the Fed probably needs to be aware of what may be going on out there, and maybe do some jawboning with the banks and investment banks to make sure the market functions from a liquidity perspective." Keep quiet Bob Moulton, president of Americana Mortgage, hoped that the central bank would keep rates steady and not say anything new about the mortgage and real estate markets. "I think if they try to help, I think they're going to make things worse," he said. "I think they're going to be reacting to a situation that really hasn't been quantified. If they drop fed funds, I think they'll scare the marketplace, saying, 'Hey, there really is a problem here.'" John Burford, vice president and investment portfolio manager for The International Bank of Miami, said that if the Fed had cut rates, it would have sent an indulgent message where something sterner was warranted. "I always like to look at the Fed and Bernanke as like my dad," Burford said. "He didn't come to me and say, 'I'm going to double your allowance, just because you deserve it.'" He said he expected the central bank to "acknowledge we've had some turbulence in the housing market and subprime lending," but it would "probably suggest that the markets are functioning well enough." Even if that means some loans -- especially home loans -- aren't as easy to come by as they used to be.
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