Wednesday, November 10, 2004

Interest Rates II

"OK," you may ask, "Why do you think real rates will go up when they haven't reacted to the Fed so far?" Fair enough. First, much of what the Fed has done this year was already built into the market. Everyone knew the Fed's rate couldn't stay down and set the markets accordingly. Second, the Fed's moves are starting to affect the cost of capital, i.e. interest on loans mere mortals like us enter into. Third, the burgeoning federal deficit is putting a lot of pressure on supply of capital, driving its price up. Big ticket items are the ones most affected by the cost of financing, and real estate is the biggest ticket item of all.


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