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We had rates for a 30 year mortgage in the Chicagoland area come close to their all time low, then start to climb higher. The Fed has done a remarkable job of propping up bond prices, which track inversely with interest rates. They have been able to keep buying bonds without adding to the national debt through quantitative easing - a.k.a. expanding the money supply. This can and has been done without stoking inflation since we currently are in a deflationary environment, rising gold and oil prices notwithstanding.

So far the only side effect we are seeing from this action is a declining dollar and increases in the prices commodities such as those mentioned above. If this goes too far we will have to become concerned about inflation. However, up to (or should I say down to) a certain point a weaker dollar actually helps our economy by making American exports cheaper for our trading partners to buy. This cheap money and cheap American exports policy is helping pull us out of the deepest recession we have had in this country since the stagflation era of the late '70s through early '80s.

Timing is everything. The Fed must be careful not to ease off of the stimulative actions too soon, yet they cannot wait too long to switch gears once it is clear that the economy is on the mend. The most important indication of this is in job creation as measured by increasing employment and decreasing unemployment. Since an economy as large as ours does not turn on a dime they must make their move when it is clear that the numbers are headed in the right direction but BEFORE they actually look good in order to prevent inflation from becoming a problem.

Therefore I am looking to the labor market as a way to forecast the direction of the bond market. Rates on 30 year mortgage loans will break out of the 5% to 6% range for a sustained period of time once it is clear that the recession is over, or once the Fed thinks is is over and just before the general public would perceive the economy to be back on track.

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