To dodge one bullet in a week is gratifying; to dodge two in one week…

To dodge one bullet in a week is gratifying; to dodge two in one week… Winston Churchill, after the battle of Omdurman in 1898, said, “Nothing in life is so exhilarating as being shot at, and missed.”


The Fed added another .25 percent to the Fed funds rate on Wednesday, bringing it to 2.5 percent. The accompanying Fed statement gave every indication of more “measured” hikes to come, making monetary policy still “accommodative” to neutral. The shot did no harm: the mortgage market stayed unchanged at 5.625 percent, and T-bonds held at 4.18 percent.


The second shot, the January payroll data released Friday morning, was expected to show strength and hit bonds hard enough to finally drive mortgage rates toward 6 percent. Instead, net of a downward revision for December, payrolls grew by only 120,000, roughly half the forecast.


The White House seized on the fall in the unemployment rate to 5.2 percent as good news, but it fell because more people who used to look for work no longer bother and have dropped out of the workforce. Legions who have found work are under-employed, as shown in the very slim, sub-inflation, .2 percent growth in wages, and a contraction in hours worked.


Relief at the weak job data sent the 10-year T-note as low as 4.05 percent Friday, and rates on mortgages fell close to 5.5 percent.


Other data may show the beginning of a modest slowdown in the economy: the twin surveys by the purchasing managers nosed over, healthy, but not so strong; and sales of new homes have put in their first back-to-back flat months in years (though it could be weather there). Another indicator: gold fell like an anvil through support at $425 to $416 as inflation and dollar fears recede.


Many on Wall Street still swear that the Fed is headed to 4 percent with its target funds rate by the end of this year, but I doubt it. Bill Gross, Chief Bond God at PIMCO (the writings at are the best bond market commentary in the public realm) says the Fed will stop at 3 percent, and he expects the economy to slow this year.


This week we began to hear from clients alarmed at new monthly statements for their home equity lines of credit, suddenly showing 5 percent, 5.5 percent, 6 percent or more. HELOCs are tied to prime rates, and modern prime floats three points above the Fed funds rate, hence to 5.5 percent on Wednesday, up from 4 percent at record rock-bottom in 2003 and 2004, going to 6 percent at minimum by the Fed’s May meeting. As of the third quarter 2004 (the Fed’s most recent Z.1 “flow of funds” statement), total HELOC balances outstanding had grown to $827 billion, expanding $40 to $50 billion every 90 days.


To have the monthly costs of these babies rise by half — often double the original teaser rates — will choke spending by those with balances and crimp new extraction of home equity by those who haven’t begun. 4 percent Fed funds would mean 7 percent prime, and some painful adjustments in floating-rate mortgages  — so painful to households that I don’t think the Fed’s “neutral” will be so high.


Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at




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