Interest rates at all maturities rose last week were crossing important divides Friday morning, pushed by the prospect of more Fed tightening ahead, perhaps a lot more.

Low-fee mortgages are still below 6 percent, but a deteriorating 10-year T-note suggests six-plus shortly.

Current and forward-looking economic data are garbled into uselessness by Katrina/Rita. In an economy as large as ours, there is no way to isolate the storms’ impact from the baseline of national economic activity. Pre-storm reports still trickling in contradict expectations for a late-summer slowdown: August orders for durable goods rebounded strongly from July. However, this week’s employment data for September and purchasing managers’ indices – the most important data in any month – won’t tell us a thing.

In the vacuum, markets are trading on suppositions about the impact of energy cost, and consequences for the Fed.

The near-dominant forecast holds that energy prices will inevitably knock consumers flat, the coup de grace to be delivered by doubled costs to heat homes this winter. Believers point to collapsing confidence numbers, and the additional drag from cumulative Fed tightening.

The alternate forecast says the economy is still growing briskly and is resilient. Certainly high energy prices will cause suffering among lower-income consumers, but also rather a lot of conservation among us all; consumer confidence surveys have little or no predictive power. Although the Fed has raised its rate for a year, it is not remotely “tight.”

The energy-slowdown group thinks the economy will slow before inflation becomes a problem; the alternate theorizers think that inflation is already a problem and the Fed has work to do.

I’m with the alternates, and I think Federal Reserve Board Chairman Alan Greenspan is, too. Last week he released a housing study (much of it his own work); among his conclusions: as of mid-2005, less than 5 percent of mortgage borrowers had current loan-to-value ratios exceeding 90 percent. Makes sense: given 10 percent-plus appreciation in hot coastal markets, it only takes a year for a 100 percent-financed buyer to fall to 90 percent LTV.

The Chairman’s concluding paragraph is an oblique warning: “Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.”

That’s not just some academic reassurance about withstanding an unpleasant conclusion to a frothy interval for housing. Implicit in the remark: the Fed need not be timid about tough measures to control inflation for fear of damage from declining home prices.

Greenspan’s study emphasizes the magnitude of consumption stimulus from a hot housing market, and increases the likelihood that the Fed will tighten until housing cracks, no matter how high its rate may have to go.

The 10-year T-note blew through 4.3 percent last week, trading 4.34 percent on Friday. However, the overall bond market shows Fed fear, not a long-rate runaway. The tipoff: short-term rates are in a heap: 2-, 3- and 5-year T-notes are respectively 4.16 percent, 4.17 percent and 4.19 percent.

The Fed is simply bulldozing the whole rate structure. Stick with the heart of the matter: the Fed must pre-empt an energy-caused inflation spike, and the only way it can do so is to slow the economy. Rates moved this week in preparation for the next .25 percent on Nov. 1, and will do so in November in preparation for Dec. 13, and so on until the economy slows.

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


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