Although we are recovering from yesterday’s annual Talk Like A Pirate Day, we are now facing the outcome of today’s Federal Open Market Committee’s meeting. Its widely expected that the Fed’s policy of raising short term rates regular 25 basis points will continue, but it may skip this increase in one of the few remaining meetings this year [WSJ]. This would be the 11th increase in the federal funds rate since June 2004.

YieldCurve9-05

Bond investors are starting to demand higher yields on the widely held consensus that the after-effects of Katrina will be inflationary. In fact, the yield curve, once flattening, is now reversing with the spread between lower short term rates and higher long term rates increasing.

Views of economic growth haven’t necessarily changed, but rather the rate of inflation alongside the growth has. Fuel and building material data will be skewed this fall, further adding to the confusion. This will likely provide upward influence to mortgage rates.

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