No Shortage of Bubbles and Troubles

Since then, with the bond market increasingly convinced that the Fed is done, interest rates on a 30-year mortgage have actually dropped. The national average for a 30-year fixed-rate mortgage was just 6.33% on Sept. 21, according to the data from Informa Research Services. That's an effective rollback in mortgage rates to March 2006, when the national average stood at 6.31%.

Another Increase Likely

That drop in mortgage rates should be enough to raise a few worries at the Fed. After having fought so hard to raise mortgage rates to let some air out of the housing bubble, the Fed can't be happy to see the bond market so rapidly undo that work. Certainly somebody at the Fed has got to be asking, "Do we need to hit the bond market with another rate increase so that investors in long-term bonds and mortgage lenders don't forget the message?"

At the long end of the yield curve, the 10-year end, the bond market right now is pricing in a cut in interest rates by the Fed in 2007. By bidding long-term interest rates below 5%, however, bond investors are likely to force the Fed to move in exactly the opposite direction. If long-term interest rates drop lower or even just stay at this level, it's likely that the Federal Reserve will move to raise rates one more time, especially if current low rates on mortgages start to show up in an increase in housing sales or home prices.

But the strongest argument against the Federal Reserve moving quickly to cut interest rates comes in the continued -- maybe even accelerated -- growth in other kinds of financial bubbles. Some of the air may have gone out of the residential real estate bubble, but the evidence argues that all the Fed has accomplished with its interest rate increases so far is to trade one bubble for another.

Commercial Real Estate Takes Off

Take a look at what regulators fear is a growing bubble in commercial real estate. On the national level, commercial real estate loans climbed to $1.3 trillion in 2005, up 16% on the year. The Office of the Comptroller of the Currency has found that a third of nationally chartered banks have commercial real estate loans that amount to 300% or more of bank capital.