Fed’s forecast for inflation is encouraging

If you’re an avid reader of ‘rate update’ you know that inflation is the primary factor that drives long-term interest rates (including mortgage rates).  When inflation expectations rise mortgage rates also tend to rise and vice versa.

I came across the graph below in a recent Economist article which shows that the Fed believes that inflation will continue to move higher towards the end of 2008 (which means mortgage rates will likely also continue to rise) and then ease as we get into 2009.  According to their expectations they believe inflation will remain HIGHER than current levels up until the end of 2009.  From this we can reasonably assume that their forecast for mortgage rates would also be that they will be higher than current levels over the same time period. 

If their expectations hold true then year-over-year inflation won’t enter into the Fed’s comfort range of 1-2% until 2009-2010.  At that point there could be significant refinance opportunities.