The Week in Review (September 17, 2007) : What to Watch For

The volatile path of mortgage rates last week followed the changing expectations for Tuesday's Federal Open Market Committee meeting.

The FOMC sets the Fed Funds Rate, a benchmark interest rate upon which Prime Rate is based.

According to Federal Funds Rate futures, there is a 94 percent chance that the Fed will lower the FFR by at least 25 basis points Tuesday. The same analysis shows a 50% chance for a 50 basis points cut.

One basis point is equal to 0.01%.

The wayward path of mortgage bonds last week reflects varying opinions about tomorrow's Federal Reserve press release and subsequent action. As the expectations for a Fed Funds Rate cut increases, mortgage rates appear to fall. When expectations of a cut damper, mortgage rates appear to rise.

The speculation will end tomorrow at 2:15 P.M., however, after which mortgage rates will rebalance. Higher or lower? We don't know.

Therefore, today may be a good day to lock an interest rate in order to avoid the risk that the FOMC surprises market participants.

Also hitting the wires this week: Producer Price Index, Consumer Price Index, and Housing Starts. Each is a predictor of inflation, but will take a back seat to the big show Tuesday afternoon. It's all eyes on the Fed for next 36 hours.