Mortgages and the Federal Reserve - Coursework Example

The prospective client must be on the lookout for events that will lead to lower mortgage interest rates. He therefore needs to be equipped with the knowledge of how to forecast interest rates. An understanding of key economic indicators can provide clues to the future direction of interest rates. These indicators are usually published and are available to everyone. Based on Woodruff (2007), they are the following: Gross Domestic Product (GDP) is the total output of goods and services produced by labor and property of a certain country and are considered as the most important economic indicator published.

An increasing trend could lead to inflation and make the Federal Reserve raise interest rates in order to slow growth. A negative growth would mean a weaker economy but is desirable because interest rates will be lower due to the need to stimulate commerce. Consumer Price Index (CPI) indicates the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services. It is the leading indicator of inflation. If the CPI registers an increasing trend, inflation is likely and interest rates are likely to rise.

The converse is also true.  Producer Price Index (PPI) is a family of indexes that measures the average change over time in the selling prices (from the seller’s perspective) received by domestic producers of goods and services. High PPI is inflationary and leads to a decrease in bond prices and higher interest rates. The converse is also true. Employment Situation: The payroll employment report involves data on employment, hours and earnings estimates based on payroll records of business establishments.

It is also used to predict other important economic indicators such as Personal Income and Industrial Production. If the Payroll Employment registers a monthly increase or increasing trend, inflation is likely and could cause interest rates to rise. A smaller-than-expected figure causes yields and interest rates to fall. Employment Situation: Information on the unemployment rate and the number of unemployed persons by occupation, industry, duration of unemployment, and a reason for unemployment is published by the government and use as a lagging indicator.

A declining unemployment rate is considered inflationary and causes interest rates to hike. The converse is also true. The reason behind this is that as more people get employed, the more people are willing to compete for a property. Creditors find it as an opportunity to maximize sales.  Consumer Credit data provides information on levels of debt for industries such as auto financing and commercial banking credit and is a good indicator of consumer spending. Although it is considered as having little impact on interest rates, it gives an idea on the degree of consumer spending.

 Housing Starts When housing starts to register a higher-than-expected increase, the economy is registering positive growth but it is considered inflationary. This scenario leads to falling in bond prices and yields and interest rates to rise. Likewise, decline or declining trend in housing activity slows the economy and can push it into a recession, causing yields and interest rates to fall.