New Federal Reserve chairman Ben Bernanke signaled he was going to follow the path of his predecessor, Alan Greenspan, when the Fed voted to raise interest rates on March 28th, for the fifteenth straight increase in two years.
The Federal Reserve voted unanimously to raise the interest rate by a quarter of a point to 4.75 percent. In response, banks and other lenders increased their "prime rate" to 7.75 percent. The "prime rate" is usually considered to be the federal funds rate, plus whatever variable percentage lenders factor in.
Interest rates dropped to historic lows in the last five years, fueling a boom in mortgage lending, which led to astronomical housing prices and an explosion in "creative" financing, such as risky adjustable-rate mortgage (ARM) loans.
With rates on the rise and housing sales dropping precipitously, many overextended homeowners are facing high increases in their monthly mortgage payments, and they may not be able to sell their houses for the prices they'd expected.
The housing market has shown signs of schizophrenia in recent months even without the continuing rate increases. Sales of existing homes showed surprising strength in February, credited to warm weather.
But sales of newly-built homes dropped to a nine-year low, apparently having nothing to do with the weather conditions in slow-selling markets.
As housing markets continue to churn and the job markets report wildly varying data, Bernanke's stated goal is to contain price increases in order to stop inflation. Like his predecessor, Bernanke's Fed issues vague statements that analysts, pundits, and investors are left to puzzle over.
"Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace," according to the announcement of the rate hike. "[P]ossible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."
Other Loans Affected
Mortgage rates aren't the only ones that may increase. Borrowers who have taken out home equity loans or lines of credit, credit card holders with big unpaid balances, and even car shoppers are facing potential hikes in their bills.
Credit card companies are taking advantage of the rate increase to gouge customers with higher late fees and penalties. Customers with variable-interest rate cards may find themselves unable to keep up with the monthly payments, and getting hit with fees in addition to their regular payments.
Meanwhile, consumers' confidence in the market continues to fluctuate. Different market watcher groups are tied up in the contradictions over how Americans are viewing the current economic situation.
The Commerce Department reported that consumer spending slowed precipitously in February, rising by just .01 percent, after an uptick of .08 percent in January. Warm temperatures were credited again for luring consumers out to shop and buy.
Meanwhile, the Conference Board, a private market research group, claimed that consumer confidence in the economy was at a high not seen since 2002. The group conducted a survey of 5,000 households on their feelings regarding the economy, and received responses from 2,500 of them.
But even the Conference Board's more optimistic report cautioned that soaring gas prices, declining housing markets, and unstable job data might cause a sharp drop in consumer confidence, which would lead to greater reluctance to spend.
Consumer spending accounts for two-thirds of America's gross domestic product (GDP), so any fluctuation in purchasing could send markets into a tailspin.
All that spending continues to take a toll on savings as well. The personal savings rate remained at negative 0.5 percent, a low not seen since the Great Depression.
And new government regulations on the addition of ethanol to gas may lead to shortages and spikes at the pump, at a time when the nationwide gas price is rapidly returning to the record levels set in Sept. 2005 during Hurricane Katrina. Average gas prices are exceeding $2.50 a gallon in most major markets.
All of this worrisome data is leading analysts, investors, pundits, and consumers to nervously nitpick every bit of financial reporting that comes down the pike, wondering when the economy may start to stabilize again, if ever. --