The Fed, inflation, and your next mortgage

October 23rd, 2012

It's shaping up to be a classic showdown this fall. No, not Romney vs. Obama, or Tigers vs. Giants. Inflation and the Federal Reserve look like they are destined to square off in battle. The outcome could determine your next mortgage rate.

The Fed vs. inflation

In mid-October, the Bureau of Labor Statistics announced that the Consumer Price Index (CPI) increased by 0.6 percent in September. If continued, that rate of inflation would project to over 7 percent a year. While any one number can be easily dismissed as an outlier, this was the second consecutive monthly CPI increase of 0.6 percent.

If inflation does flare up to a 7 percent annual rate -- or even half that amount -- you can expect it to quickly put an end to 3.5 percent mortgage rates. For one thing, lenders are unlikely to make long-term loans at or below the rate of inflation. For another, rising inflation could force the Fed to drop its intervention to lower mortgage rates and focus instead on fighting higher prices. The more evidence of inflation accumulates, the more a showdown with the Fed becomes inevitable.

Keeping track of the variables

As the Fed and inflation struggle for the upper hand, it could cause some volatility in mortgage rates. While the rates themselves are somewhat abstract to most people -- percentage rates just don't have the resonance of dollars and cents -- you can easily keep track of what the changes mean to you with a mortgage calculator.

How you use a loan calculator depends on your approach to the housing market. If you have a set price in mind, you can use a mortgage payment calculator to find out how much that size of loan would cost you on a monthly basis at today's mortgage rates. On the other hand, if you have a monthly payment budget in mind, you can use a mortgage calculator to see how the latest change in rates has affected the price you can afford.

Either way, with two moving variables in play -- neither home prices nor mortgage rates are known for staying still for very long -- you'll want to keep regular track of what the changes mean in dollars and cents, until you are finally able to make your purchase.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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