Everything You Need To Know About The Federal Reserve’s December 2020 Meeting
We’re all busy trying to help those in the market to buy or refinance a home with the last few loans of the year, trying to close out strong. For that reason, I’ll get straight to the point. The Federal Reserve kept interest rates at levels between 0% – 0.25% and they plan to do so for quite a while.
We got some news on future plans for short-term rates. Additionally, there are some other details on the purchase of mortgage bonds and treasuries. We’ll get into the nitty-gritty below, but the upshot should be very exciting for those of us who like low rates.
You can find my analysis in bold.
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The Federal Open Market Committee (FOMC) is standing by its commitment to support the American people by helping prop up the economy they count on in a time of crisis.
The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
Here the Committee touches on several things in a relatively short paragraph. First, it acknowledges that everything is really dependent on COVID-19. At this point, it’s a COVID world, and we’re living in it.
This paragraph is always a bit of the status report: Activity within the economy has picked up a bit as has employment, but both are on a long way off from where they were in February. Inflation remains a sticking point for the Committee, but they think gas prices have a lot to do with it. Higher gas prices are a big reason for overall inflation in normal times, but no one is going anywhere.
Finally, Committee members say that conditions within the financial markets make it easier to get money through lending at the moment, which is intended to help stimulate the economy.
The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.
The virus is calling the shots right now, and for the economy to fully recover, it’s important to get that under control. Much of this is going to depend on how quickly and widely the general public can be vaccinated to give Americans confidence that things can get back to normal. Whole sectors of the economy are depending on a vaccine.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
This is a paragraph that only seems to get longer with every statement, but I’ll try to break things into chunks.
First, the Committee decided to leave short-term interest rates in the current range of 0% – 0.25%. This is key for mortgage rates because longer-term rates tend to follow the same general direction as shorter-term rates. Mortgage rates are about as low as they’ve ever been and this does nothing to change that.
This is also one of the releases where the Committee gives its projections for the coming year. The median projection of the members is that rates will stay the same until at least 2023. One of the big reasons for this is that the Federal Reserve wants to let inflation run above 2% for a while in order to make up for several years of persistently low inflation.
The Fed would like to see a longer run average of 2% inflation in order to encourage buying, which stimulates the economy and employment.
In addition to the interest rate piece, the Federal Reserve has committed to buying more agency mortgage-backed securities (MBS). The more demand there is for MBS in the bond market, the lower mortgage rates will be because the yield on the underlying bond doesn’t need to be as high to catch the eye of a buyer. Purchases of treasuries don’t have a direct impact, but rates tend to follow the same direction.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
The FOMC doesn’t make decisions in a vacuum. This section gives insight into the various data points they look at in coming to their policies. One thing that’s unique to a COVID world is the intense focus on public health. Stopping the virus is job one for a healthy economy.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
All the Fed officials voted for this policy in unison.