| Inflation is typically the most important focus for the mortgage interest rate market. Unfortunately, mortgage interest rates have recently pushed higher from the fear of inflation. Most of the recent increases in interest rates have come following annoucements of stronger than expected economic data because of continued uncertainty regarding the future of the economy. This uncertainty has caused rates to be higher than are normally predicted relative to the 10-year Treasury note rate, which is the rate that most closely tracks mortgage interest rates.
The level of interest rates reflects the balance between the supply of money from investors and the demand for money by borrowers. Rising inflationary expectations cause investors to require higher rates of return on investments to compensate for the erosion of the principal that eventually is returned to them. Regardless of inflation levels, though, rising economic activity can increase the demand for investors’ funds, and thereby lead to higher interest rates.
The demand for money diminishes as the economy struggles. The Fed lowers interest rates as an incentive to businesses and consumers to increase their borrowings. The Fed hopes manufacturers will increase their investments in plants, equipment and inventories and that consumers will push housing construction higher along with consumer spending and with that, consumer debt. The inverse is also true.
Analysts will monitor this week's consumer credit levels for any indications that consumers may be tapped out. The economy has been wobbly for some time now and even Fed Chairman Bernanke has voiced recession concerns.
There is much debate in the financial community about the future. Economists, market analysts, and traders all seem to have a different opinion about the future state of the economy and especially the effects of rising energy prices. One thing most market participants agree on is both the bond and stock markets are going to see some volatility until a direction is clear.
Remember, the Fed cuts rates to spur the economy, which generally helps stocks at the expense of longer-term bonds. Longer-term bonds are what most closely correlate with interest rates. Now is a great time to take advantage of rates to avoid the uncertainty in the credit markets and the potential for mortgage interest rate increases due to continued inflation fears. | 
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