Interest Rate Brief

Updated: 27-Aug-07

The Interest Rate Outlook

10-year yields seem to have found a near term holding point at 4.6%.  The fears surrounding the subprime mortgage contagion have provided the downturn from 5.2% in early July.  The flight to quality at the short end has shown a partial reversal as bill rates are back near 4.5% given market expectation for a number of Fed eases over the rest of the year.  Bernanke is chosing a more targetted attack on the subprime mortgage illiquidity gap for now as the outlook for the September 18 FOMC remains murky given Fed speak and how little an ease in the funds rate will aid the problems in the mortgage market.  A policy move could come before the meeting if the markets begin a meltdown.  Plenty of economic news this week but the focus remains on the Fed's success in supplying needed liquidity to the corners of the financial markets that need it. 

The longer term outlook depends on how the current mortgage illiquidity problems are addressed.  If the Fed chooses to lower the funds rate we suspect it will bring more than a 1/4%.  The Fed would prefer to keep the mortgage problem outside of its policy decision making but may not be allowed to do so.  Briefing.com continues to expect  stronger economic growth in the second half but we have shaved down the outlook given the added credit pressures.  The discount rate ease certainty opens the door for the FOMC to ease and possibly a number of times if the subprime contagion continues to spread.  We don't currently see any reason for 10 year yields to fall below 4.5% over the intermediate term and expect that rate to eventually return to or above 5%.

Long Term Interest Rate Graphs

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