Well, not exactly pillow talk, but I was at lunch last week with a small group that included a prominent economist who is a former governor of the Federal Reserve Board. When the talk turned to real estate - doesn’t it always? - there seemed to be a consensus that the economy is slowing and that a rate cut is imminent. However, the economist disagreed. Here is pretty much verbatim what he said. “You won’t read this in the newspapers, because it isn’t politically correct to say, but with a minimum wage hike looking like a certainty” - the bill is in conference committee and should be going to the White House soon, and the President is expected to sign it - “don’t expect to see the Fed lowering rates any time soon. There is already a whiff of inflation in the air, and the Fed will want to be especially cautious with something as potentially inflationary as a minimum wage hike looming. The hike will be phased in over twelve months, and I would be very surprised if the Fed drops rates in the next six to eight months unless there is some extraordinary economic event that calls the Fed to action”.

What does this mean for mortgage rates? Well, on the surface it is disappointing for a couple of reasons: a Fed cut would have an immediate effect on home equity line rates and adjustable rate mortgage payments. An immediate Fed cut would probably bring down all mortgage rates, although not necessarily: sometimes a Fed cut can be viewed by the markets as potentially inflationary, and long rates - the ones that correlate with the rates on loans fixed for five years and longer - can sometimes rise after the Fed drops the Federal Funds rate. The good news about the Fed pausing for six or eight months before cutting rates is that this will probably add a brake to an already slowing economy; this might cause interest rates in 2008 to drop even more sharply than they would if the Fed started cutting rates sooner. This would be very good news to all the borrowers who need to refinance out of 5 and 7 year fixed loans, and ARMs, in the next few years.