With Prime currently at 7.25% I am sure banks will be raising that to 7.50% by tomorrow morning. But it looks as if they are thinking about slowing the rate hikes. Unless we got some off the wall numbers in the next coming weeks, we should only have one more rate hike for the year. I believe the economy is at a moderate pace. Although with low unemployment and high energy prices, there is chance that inflation will take off.

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Fed Raises another .25bps

Jan. 31 (Bloomberg) -- Federal Reserve policy makers, meeting for the final time under Chairman Alan Greenspan, raised the main U.S. interest rate to 4.5 percent and suggested the run of increases is still not finished.

Fed officials modified their language about where the overnight bank lending rate may be headed and stopped saying rates may rise at a ``measured'' pace, a phrase used at each meeting since May 2004. The quarter-point rate boost was the 14th in a row.

``Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance,'' the Federal Open Market Committee said in a statement after meeting today in Washington.

The rate decision was Greenspan's final stamp on Fed policy, which he steered since August 1987 through a record 10- year expansion and two short recessions. Greenspan, 79, retires today and turns over the Fed to White House economic adviser Ben S. Bernanke, 52, who was confirmed by the Senate today and will be sworn in at the Fed at about 9 a.m. tomorrow.

The benchmark 10-year Treasury note fell and the dollar pared a decline against the euro after the statement suggested the Fed isn't finished raising rates. The 10-year note's yield rose 2 basis points, or 0.02 percentage point, to 4.54 percent at 2:42 p.m. in New York.

Tougher Decisions

The unanimous decision lifted the target rate from 4.25 percent to the highest since May 2001. The main changes in today's statement were the dropping of the word ``measured'' and the substitution of ``may be needed'' instead of ``is likely to be needed.'' The FOMC also characterized recent economic data as ``uneven'' while noting that expansion ``appears solid.''

Greenspan is retiring after two straight years of economic growth exceeding 3 percent and job gains of more than 2 million. Inflation as measured by the Fed's preferred gauge has stayed low even after last year's hurricanes triggered a surge in energy prices. At the same time, a housing market slump in some areas may threaten consumer spending.

``As we go forward under a Bernanke Fed, the decisions will really become very much data driven,'' Richard Clarida, a professor at Columbia University in New York and former chief economist at the U.S. Treasury, said in an interview. ``I think the futures markets have correctly priced in that beyond that first Bernanke meeting in March, we really can't see the direction of the Fed.''

President George W. Bush nominated Bernanke, chairman of his Council of Economic Advisers, for the Fed post in October. Bernanke was a former Fed governor and Princeton University economics professor.

The number of additional increases needed to control inflation ``probably would not be large,'' Fed members said in the minutes of the December meeting released this month.

The policy outlook ``was becoming considerably less certain,'' and future rate decisions ``would depend on the incoming data,'' the Fed said in the minutes. The Fed will release minutes of today's meeting Feb. 22.

``I don't think we are done yet,'' Richmond Fed President Jeffrey Lacker, a voting member of the FOMC this year, told reporters Jan. 20. There will be ``at least one'' increase in the target rate. ``I don't view that as anything different from the statement'' on Dec. 13, he said.

Greenspan hasn't made a public comment on the economic outlook since a Dec. 2 speech, in which he said that ``despite the disruptions of Hurricanes Katrina, Rita, and Wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006.''

Economic Outlook

In his most recent comments on prices, Greenspan told the Joint Economic Committee of Congress on Nov. 3 that there is ``more uncertainty'' about the outlook for inflation.

Those predictions may have weakened after the latest reports on fourth-quarter growth and prices.

``They're faced with what is probably a moderation in growth, but a slow acceleration in inflation,'' Joel Naroff, chief economist at Commerce Bancorp Inc. and president of Naroff Economic Advisors in Holland, Pennsylvania, said Jan. 27. ``The question is, where does inflation go from here? I think that will be the driving factor, because I don't think growth is going to stay this slow.''

Auto purchases, for one, are rebounding. Autos sold at a 17.2 million annual pace last month, up from 14.7 million in October, the slowest sales month since August 1998, according to industry figures, after General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler announced new incentives in mid- November to jumpstart demand.

The increase in the federal funds rate has had ``no significant impact thus far'' on financed sales and probably won't unless it rises at least another 3 percentage points, said Michael Jackson, chief executive officer of AutoNation Inc., the world's largest retailer of cars and trucks.

``I don't see that happening from a Fed perspective,'' Jackson said in a Jan. 25 interview. It would take another 3 or 4 percentage points to ``really knock this consumer off stride,'' Jackson said. About 70 percent of customers finance their purchase of or lease cars, he said.

Quoted: I used to have a friend who was a realtor who kept urging me to get an adjustable rate mortgage, back when rates were low, because he figured most people only stay in a house for 5-6 years. Glad I didn't listen to him.

5-6yrs is actually the "average" for the US. I doubt anyone on this board is "average"

Locked in at 5.25%, and ten years to go......plus with appreciation I have more equity than debt in the house.  Taxes are a royal biatch, though.

Quoted: I am taking it in the O ring now for months with the int only mortgage. Was a great 2 years ago

OUch!!! IO's are never good.

Quoted: I do. It is fixed @ 3.75% for another 30 months, then it will adjust upwards at no more than 1% a year. So, I have a while before I'll be paying 7%. The condo will be sold well before that point anyhow. ARMs are great if you use them correctly.

Yes that is the proper way of using an ARM. Historically interest rate cycles ever 3-5 year. So having a 5 and 1 ARM right when rates are low is advantageous. Also if you have a job that you know will make you move, an ARM is a great way to save money.

The gamble is being able to refinance at a good level before it resets.

Well it looks like the banks raised their prime rates to 7.50% at the close. Those poor bastards with ARM

Quoted: Won't the level of pain correspond to whatever index the adjustable rate is tied to? If the ARM is tied to prime there will be trouble, but long term interest rates have barely budged because most bond traders see little risk of long term inflation. I have a fixed rate mortgage because I didn't want to assume rate fluctuation risk and was willing to pay a slightly higher initial rate for that, but my understanding is that ARMs can be tied to all different measures.  Are most tied to prime rate?

They are either tied to LIBOR or the Prime rate. Just depending on how the ARM was structured. Regular fixed rate mortgages are tied to the 10yr bond in that when a mortgage is underwritten, it is typically securitized in a form of a Mortgage Back bond. Which gets it rate as a spread to the Treasury. So underwriters keep this in mind when handing out rates. This scenario only holds true for prime paper(good credit loans) sub prime lenders securitize a different way.

And yes there will be trouble. Everyone has talked about housing bubbles. It will happen only not nationwide. Just in hot spots. NYC, MIAMI, CA and VEGAS to name a few. HOuses have skyrocted and in order for normal folks to afford it or keep up with the Joneses, they have taken out Int Only loans, ARMs., seconds, and other Exotic means of financing. This will cause defaults in the long should the rates cotinue to climb. Only thing holding it up right now is wage earning and low unemployment.