Fixed mortgage rates run in place; ARMs move ahead

By Holden Lewis

For more than a month it has been obvious that the Federal Reserve would raise short-term interest rates at the end of June. Yet, over the past three weeks, rates on 30-year fixed mortgages have barely moved.

The benchmark 30-year fixed-rate mortgage clocked in at 6.30 percent, the same as last week, according to the national survey of large lenders. The mortgages in this week's survey had an average total of 0.33 discount and origination points. One year ago, the mortgage index was 5.50 percent.

The benchmark 15-year fixed-rate mortgage fell 1 basis point to 5.71 percent. A basis point is one-hundredth of 1 percentage point. The benchmark one-year adjustable-rate mortgage rose 7 basis points to 4.43 percent.

Rates on 30-year fixed mortgages have remained between 6.30 and 6.37 percent for eight weeks in a row. Lately they have been in a holding pattern, awaiting three big events that had been scheduled to take place in the last three workdays of this week: a turnover of nominal political power in occupied Iraq, the Federal Reserve's interest rate policy meeting, and Friday's release of the June employment report.

The turnover in Iraq took place two days early, and the market in long-term interest rates reacted with a one-day upward blip.

Interest rate markets already had priced in a series of Federal Reserve short-term rate increases. Rates for long-term, fixed-rate mortgages began rising in March, when employment finally began to pick up and a Fed rate increase became inevitable. Fixed mortgage rates went up almost one percentage point from mid-March to mid-May. Rates on adjustable-rate mortgages reacted later, moving up almost a percentage point in two stages -- April and early June.

A Fed rate increase was a foregone conclusion. Counterintuitively, the impending short-term rate increase has been the main factor keeping long-term mortgage rates steady.

"The view is that the Fed is going to move to control inflation," says Lynn Reaser, chief economist for Banc of America Capital Management. "As a result, we've probably seen most of the increase in long-term rates that we will see this year."

She believes that the 30-year mortgage rate generally will remain between 6.25 percent and 6.75 percent during the rest of 2004.

Finally, there is the impending June employment report, scheduled for release the morning of July 2. In the first half of this year, the monthly employment reports have driven big fluctuations in mortgage rates. But the employment reports' moment in the sun is ending, eclipsed by inflation reports.

Prices have been creeping upward, but Federal Reserve officials have said that they will raise rates aggressively if that's what's necessary to ward off inflation. The Fed's jawboning has kept Treasury yields and long-term mortgage rates in check -- almost surely the effect that the Fed intended.





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