What Mortgage Brokers Should Know About The September Federal Reserve Statement
The Federal Reserve chose not to change short-term interest rates at its meeting yesterday. However, that only tells part of the story. As always, the devil is in the details.
The short version is that the Committee expects rates to stay low for quite a while. However, there was a policy change announced and some genuine debate around the monetary policy moving forward. Disagreement breeds excitement.
My comments on the release are in bold below.
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.
While this language is becoming pretty standard, there’s something that’s at least a little bit reassuring about the fact that the Federal Reserve is willing to pull out all the stops in order to aid in the economic recovery.
The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
On the plus side, the overall economy and employment are recovering. On the downside, no one knows how long that recovery will be because we’ve got a way to go. Even with fiscal and monetary policy support, the Federal Reserve would like to see consumers buying more and prices going up.
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.
COVID-19 tracking is like that weird hobby you pick up and you want to stop, but you can’t quit. The Fed is tracking spread just like the rest of us because it has major implications for the economic recovery.
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.
It only seems like this paragraph is the long as “War and Peace.” Let me break it down into bite-size chunks.
First, the Fed would like to see inflation at around 2%. Although higher prices might not seem great, they can serve as a key to keeping the economy going. If people think prices are going to go up in the near future, they’ll buy now. That causes businesses to hire workers to produce more goods and services.
The problem the Fed has is that inflation has been persistently low, under the target for several years running. To deal with this, the Committee is endorsing a policy of letting inflation run above 2% for a while in order to make up for the period of low inflation.
To that end, the Committee didn’t raise short-term interest rates and doesn’t expect to do so before 2024 based on the median projection. That was the first good news for those in the mortgage business.
The other tantalizing piece of information for mortgage brokers is the idea that the Federal Reserve will keep buying agency mortgage-backed securities (MBS). Mortgage rates move inversely with mortgage bond demand because if there are more buyers in that market, the yield doesn’t have to be as high to attract a buyer.
The Fed buying lots of mortgage bonds should support a low-rate environment for some time to come.
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 has always included this paragraph which talks about the information they look at in making their policy determinations. The thing in here that’s not normal is the reference to public health. 2020 is a wacky year.
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; Loretta J. Mester; and Randal K. Quarles.
The action passed, but consent wasn’t unanimous. Let’s see who disagreed and why.
Voting against the action were Robert S. Kaplan, who expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point; and Neel Kashkari, who prefers that the Committee to indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis.
Robert Kaplan agreed with the general sentiment of the statement, but he wanted there to be more room left for other policy actions once we get beyond this, if necessary.
Meanwhile, Neel Kashkari wants the inflation target tied to core inflation rather than the overall number. Core inflation takes out prices for things like food and energy, so there’s less seasonality in the measurement.