Quote:
Originally posted by SoCal911SC
Why would interest rates be raised in the face of a declining housing market and corresponding declining GDP?
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The nightmare scenario is weak economic growth plus high inflation aka stagflation. Rising energy prices raise the risk of that scenario, since energy is an input cost for most industries and also can crowd out other consumer spending. Flashback to the nasty late '70s. The current Fed has made it clear that their first priority is to head off/stamp out inflation, even at the cost of slower economic growth. Central banks are inflation hawks at the core.
Add the Fed's worry about a housing price bubble. Greenspan has sent mixed messages about this. He denied that national housing price bubbles were possible. Then he warned explicitly about "froth" in housing markets. Recently, he has said that even if the Fed detects an asset price bubble, it can't do anything. Confusing? Plus we don't know the view of the next Fed Chairman (aka Bush's personal loan officer or some other Texas crony). But there is some risk that the Fed will actively try to deflate the housing market.
Add the ballooning federal deficit. In theory, if the federal government needs to sell more and more debt, it needs to offer buyers a higher interest rate. All other factors being equal, of course.
Anyway, this is just rambling, but what you described is not impossible . . .