What Mortgage Brokers Need To Know About The Federal Reserve’s Latest Statement

With the election results still hanging in the balance, the Federal Reserve may have been trying not to deviate at all from the latest course of action. According to one prominent analyst I watched this afternoon, the differences in the statement were so minute that they could be boiled down to seven words. The upshot for brokers:

More of the same. And that’s a good thing. The current low-rate environment that has been helping your clients achieve their homeownership dreams and accomplish their financial goals was expected to continue coming into this meeting, and this statement did nothing to change that.

I’ve broken down all the details 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.

I’m fairly certain they can copy and paste this into every statement for the next year, and it’s not going to change, but it’s good to know that the Federal Reserve has Americans’ back.

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.

In addition to reiterating its pledge to support the economy through policy for the second time in two paragraphs, the Fed says that COVID-19 has had a major negative impact on the economic outlook. While things have started to come back, they’re nowhere near where they were in February before the virus took hold.

In particular, gas prices were called out as being extremely low, which combined with low demand, has kept prices down. It’ll be interesting to see if people are traveling for the holidays or if there will be a major uptick in Zoom gatherings.

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 Federal Open Market Committee doesn’t have a lot of policy options at its disposal in order to help the economy function, but many of their tools have already been deployed. Future opportunities at growth really depend on effective mitigation and treatment of COVID-19.

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, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

This is the part of the statement that every investor and general market watcher skips to because it’s the single most important paragraph in showing policy.

The Committee chose to keep short-term interest rates right where they are at historically low levels. Because short- and long-term rates correlate with each other, this is a good thing for mortgage rates.

The Fed will likely keep rates low for the foreseeable future because inflation isn’t as high as it might like to see. Because of this, Committee members are willing to let inflation run higher so that it can catch up and exceed the Fed’s 2% annual growth goal for a while in order to make up for some price stagnation in the past several years.

If prices rise, consumers are incentivized to buy now, which has the effect of stimulating spending and employment to produce those goods and services.

Another really important thing for observers and those with a stake in the mortgage market is the fact that the Fed continues to promise to buy more agency mortgage-backed securities (MBS). This is important because rates are tied to the prices on these bonds. If there’s more demand in the market, the bonds can be offered at a lower yield and still gain the attention of a buyer. This has the effect of keeping rates low.

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 Committee doesn’t tell us everything, but it likes to give us a broad idea of what they look at in making economic decisions. With COVID-19, public health might be the most important factor in the economic outlook for the next year or so at least. However, inflation, employment and market developments both at home and abroad will also impact their decisions moving forward.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Patrick Harker; Robert S. Kaplan; Loretta J. Mester; and Randal K. Quarles. Ms. Daly voted as an alternate member at this meeting.

All members of the Fed were on the same page. Is your mortgage business ready for liftoff? Become a partner with Rocket Pro^SM TPO to reach new heights.