The overall economy is truly a balancing act of sustaining growth at a moderate pace. This breaks down to the economy growing and inflation staying at a level that the Federal Reserve is comfortable with. Inflation is essentially explained as the rate at which goods or commodities increase in price over a measured period of time. Too large of an increase in the rate of inflation is bad for the markets as it erodes away the value of currency. The U.S. economy is struggling with high unemployment, corporate earnings that are slowing down and now rising inflation. The main cause of rising inflation is the rapid increase of energy costs. With oil surging over $100 a barrel it significantly impacts the entire market. This was evidenced recently as the Federal Reserve only cut the fed funds rate to 2.25% as most economists believed they would go down to 2% and move on a full one point rate cut. The impact of inflation on mortgage rates is that investors who fear inflation in the market require a higher premium to purchase a mortgage bond as the value of their dollar diminishes. The net effect is that it causes mortgage rates to move higher, even when the economy is struggling.

3-23-2008 ©LowRateMortgage.com

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