Looking ahead to next week's Fed meeting

The Federal Open Market Committee meeting is scheduled for next Tuesday and Wednesday, March 20-21. While the chances of any Fed movement at this meeting are essentially nil, this Fed meeting will garner more attention than recent nonmove meetings. And the conjecture over when we will see a Fed move has increased in recent weeks.

Judging by the pricing of fed funds futures contracts at the Chicago Board of Trade, the odds increase significantly that we'll see a rate cut in the third quarter of this year. This is not to say that we will, but that is where expectations currently sit for those inclined to speculate on, or hedge against, such activity. Also, trading volume is very thin for contracts that far out, so the "odds" purported by them can swing wildly as expectations change in response to economic data.

Of course, long before the Fed can be prompted to act on interest rates, we'll start picking up clues in the members' speeches and post-meeting statements. The statement following next week's meeting could carry a more balanced tone than that of the January meeting.

Specifically, the Fed's reference to "tentative signs of stabilization" in the housing market will go. Inflation will remain on the Fed's radar screen, so expect them to retain the statement that "inflation pressures seem likely to moderate over time." But they could well soften the rhetoric about "some inflation risks remain" and "extent and timing of additional firming."

I continue to believe the Fed's next move will be to cut interest rates, but that such a move is not imminent. And I don't think this will usher in an era of repeated Fed cuts. Instead, and I've used this analogy before, two or three Fed rate cuts over a period of months will equate to the type of subtle steering adjustments made while traveling on an interstate highway, not wholesale lane changes.

How can I be so optimistic about the economy amid the barrage of headlines about turmoil in the subprime mortgage market? Currently, 14 percent of borrowers account for 70 percent of the increase in delinquencies, so this is very much a story about the subprime market and not the overall mortgage market.

For the vast majority of borrowers -- those that have credit scores above 660, can document their incomes and are making some form of down payment -- borrowing conditions have improved. For those borrowers, mortgage credit is plentiful and rates are the lowest since December. This will assist many households in refinancing themselves out of harm's way, avoiding the type of payment shock that is wreaking havoc with subprime borrowers.

Also, unemployment is 4.5 percent. The economy created greater than 100,000 jobs each month over the past year. These aren't the signs of an economy teetering on the brink. Yes, the economy is growing at a slower pace and housing will continue to be a drag on growth until the overhang of unsold homes is alleviated. But as long as prime borrowers act ahead of time to avoid rate reset carnage, the problems of the subprime sector will not spread beyond that and will not have a substantial impact on a $13 trillion economy.

This is not to be dismissive of the current situation at all. There are increasing numbers of borrowers that are unable to keep up with their mortgage payments and that is serious business. But here are the things that every homeowner with a mortgage must determine right now.

Will your rate reset?

If so, when?

By how much? All of this information can be known by checking your original loan paperwork. If you can't locate that, then call your lender and ask. In figuring how much your rate will increase, just add together the index and margin specified for your loan. You can track the index for your loan at Bankrate's Rate Watch page.

Knowing this, borrowers can determine whether they should refinance, try to sell or just pick up a second job or some overtime to generate the income needed for higher payments. Aside from the health of one's family, I can think of few things with a higher financial priority than maintaining the roof over your head. I suspect most borrowers, if they know the information I've outlined above, will move heaven and earth to stay current on their payments.

Reader e-mail: Does anyone have any questions? Yes, you sir. Go ahead.

"Since the mtg industry has not seen this type of retrenchment and overall net effect to economy from housing variables...how does this data correspond/overlay with the housing trends that occurred in 1990/1991/1992? I figure we are about six to nine months into a housing correction; are housing corrections usually about four to five months in length?

"Back then, wasn't the retrenchment to housing due to primary job losses and U.S. economic slowdown, yet this time by the use of artificially low interest rates and subsequent 'ponzi' effect in housing prices?

"Will history repeat itself less severely this time due to better disintermediation and greater global cash flows seeking out 'value' in what is obviously a housing reset?"

The current state of the economy will be a significant buffer, in general. The individual housing markets faring the worst currently are those that are suffering economically -- Katrina-ravaged states along the Gulf Coast and midwestern states in the midst of a manufacturing malaise. So the economic underpinnings are key to the housing market.

Economic releases: The producer price index, or PPI, was released this morning and it showed sharper increases than what was expected. The headline PPI was up 1.3 percent versus 0.5 percent expected, while the core PPI that excludes food and energy increased at a 0.4 percent pace, compared to 0.2 percent expected. In the past 12 months, the headline PPI has increased 2.5 percent and the core by 1.8 percent.

While the PPI delivered disappointing news on the inflation front, it is still relegated to the inflation undercard. The main event, as far as inflation is concerned, comes tomorrow with the consumer price index, or CPI, and the latest on capacity utilization.