Dorchester Condominiums

The U.S. Federal Reserve on Tuesday raised short-term interest rates by another 25 basis points, the 11th consecutive quarter-point rate hike in 15 months.

The Federal Open Market Committee increased the target on the fed funds rate, its key tool for adjusting monetary policy, to 3.75 percent from 3.50 percent and to its highest level in more than four years. The move matched many pundits' expectations, although Hurricane Katrina has thrown into doubt further tightening measures later this year.

The Fed in its accompanying statement kept language that suggests the central bank sees room for more tightening but in small steps.

Rates Keep on Inching Up
Submitted Sep 19 2005 5:19PM CST

U.S. Treasury securities found buyers on Monday - the day prior to the Fed's expected eleventh straight rate hike. There has been much talk about what the Fed would do about rate hikes in the wake of Katrina, including some sentiment for a pass at this meeting just after the hurricane struck. But signs of inflation - although not rampant - have made their presence felt in a number of different reports, and current thinking seems to support a 25-basis-point increase in the fed funds target rate as necessary to fight inflation. Inflation robs fixed-rate assets of their value.

In addition, there has been aggressive buying in metals, such as gold and copper, which is seen as a safe-haven buy. Although Treasuries did benefit from steady buying, yields edged down only slightly. This kept mortgage rates that are based on yields at relatively high levels after the big sell-off in Treasuries last week.

Oil Buries Stocks

A 7-percent-plus increase in crude oil prices weighed on the equity markets, which opened in negative territory and closed there, giving back Friday's substantial gains. Concerns regarding oil were twofold, with the emergence of Tropical Storm Rita weighing the most heavily. This storm could hit the Gulf Coast area around Louisiana and Texas, with the potential of disrupting oil production in the area again. And as an extra, OPEC said today that it is no longer in favor of raising crude oil output by up to 500,000 or 1 million barrels a day. This news, however, paled when compared to concerns about the impact of another hurricane in the Gulf.

Aside from a 6 percent increase by Nike after topping quarterly earnings forecasts and another jump in oil and oil services stocks that benefited from the rising price of crude, there were few bright spots on Wall Street. And there were no economic reports to provide relief or guidance.

Only three Dow Jones components closed in positive territory, although Hewlett-Packard (+1.9%) and Exxon (+1.5%) showed good gains. Wal-Mart posted a modest increase.

GM was the Dow's biggest loser, falling 3.6 percent on high oil prices and concerns about contract talks with one of its unions. Honeywell and McDonald's each lost more than 2 percent, while AIG shed 1.6 percent. Eight additional components lost more than 1 percent, but those losses were below the 1.3-percent mark.

The Nasdaq was again pulled down by the chip sector, and it got an additional tug due to a downgrade of eBay. Only two tech bellwethers -- Sun Microsystems and Oracle -- closed in positive territory, and gains were negligible. On the other hand, JDS Uniphase dropped 3.8 percent - due in part to some profit taking after rallying big last week. Another five big cap techs lost more than 1-percent each, while Microsoft, Intel and Ericsson each dropped less than 1 percent.

At closing:

The Dow 30 Industrial Index fell 84.31 points (-0.79 percent) to 10,557.63; the Nasdaq Composite index lost 15.20 points (-0.70 percent) to 2,145.46, and the benchmark Standard & Poor's 500 Index slid 6.89 points (-0.56 percent) to 1,231.02.

The 30-year Treasury bond rose 10/32 with the yield falling to 4.54 percent from 4.56 percent at Friday's close.

The 10-year Treasury note was up 7/32 in price with the yield falling to 4.24 percent from 4.26 percent at Friday's close.

The 5-year Treasury note gained 6/32 in price with the yield edging down to 4.02 percent from 4.05 percent at Friday's close.

At 4 p.m. EDT, AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.621 percent versus5.606 percent at Friday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.212 percent from 5.195 percent at Friday's close.

Coming Up:

Tuesday the Federal Open Market Committee will meet for the sixth time this year, and it is largely expected (although not 100 percent) that it will raise target fed funds rates to 3.75 percent - the eleventh such increase since June 30, 2004. Concerns about inflation being stoked by high oil prices are the primary impetus for the rate hike. Of course, there will be major focus on the accompanying statement for clues of future intentions.

Also due are Housing Starts and Building Permits for August - the first look at the housing industry for that month. Analysts expect softer numbers, with starts at coming in at an annual rate of 2.03 million units - down from 2.04 million in July. Building permits, which often indicate future starts, are expected to fall to 2.12 million from the 2.17 million reported in July.

Overnight and into Tuesday mortgage rates could level off due to today's slight decline in Treasury yields. If the Fed goes ahead with the expected rate hike and offers no surprises in its statement, it is possible that rates could edge down slightly going into Wednesday.

Carolyn Siegel

carolyn@interest.com

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