What is the Fed Thinking?

Who knows. But the Federal Reserve Bank of Cleveland has some charts that show what the expectations of the market are based on the Chicago Board of Trade's Options Market. Apparently we think that the Fed Rate will stay at the current 5.25% in December, and a few think that the rate will be cut to 5%.

Pimco's Bill Gross thinks that the Fed will cut rates in 2007 as the economy cools off. He doesn't say when next year though. Just next year. He goes on to say that the old trick of slashing rates may not do the job as it has in the past. This may be the first time since banking deregulation in the 1980s that housing is the drag on the economy. The Fed may have to come up some new ideas to get us up and running. That's what he says.

If the Fed starts cutting rates, this may help the borrowers who need to refinance ARMs as they mature into fully indexed adjustable mortgages. Refinance activity will increase somewhat. I don't know if purchase activity will increase as a result since there are too many other factors such as sellers who still want (or need) top dollar, currency fluctuations that may not go our way, and the fact that a weakening economy generally doesn't put much money in the consumer's pocket.