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Monday, September 18, 2006

Interest Rates Expectations

By Yaser Anwar, CSC of Equity Investment Ideas

When interest rates were reduced to 1% in the end of 2000 and start of 2001, housing had been one of the major factors in the GDP growth.

As interest rates were historically low, people could afford multiple mortagages. With interest rates at 5.25% & high gas prices, consumers are feeling the pinch.

Recent economic activity points to slowing of the economy, however, core CPI remains above Fed Chairman Ben Bernanke's target range of 1-2%, currently at 2.4-2.6%.

According to EuroDollar futures (based on US dollars in foregin banks) the probability of another rate hike is quite low, especially in next week's Fed meeting.

High interest rates have already lead to higher mortgage re-adjustments, unemployment is slowly creeping up as the housing market is in doldrums. Why? Housing sector created 1/3rd of the economy's jobs & now homebuilders are reducing work forces in the line of higher interest rates.

Inflation is slowly creeping up but growth has slowed materialy, hence the net effect is both forces canceling each other out. I expect interest rates start to declining from Summer 2007.

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