What Mortgage Professionals Should Know About The Federal Reserve’s July Meeting
At its meeting yesterday, the Federal Reserve made a decision on short-term interest rates. It ultimately decided to leave them right where they are at levels near zero. None of this was unexpected.
Everyone in the markets had much more anticipation for the actual content of the statement. People are looking to get a read on what the Fed might do going forward as everyone is still dealing with COVID-19 for the foreseeable future, barring major medical progress.
The bottom line if you’re reading this is to let your clients know that we remain in an environment that’s very supportive of low mortgage rates. There’s nothing in the statement that would jeopardize that. It’s a great time to get a mortgage if your clients are ready.
You can find my analysis of the Federal Reserve’s announcement below. My thoughts are 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.
While it’s a given that the Federal Reserve wants to do everything it can to support a fully functioning economy, the Committee members really wanted to call it out given that this is a situation that very few still living have ever dealt with.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment have picked up somewhat 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.
This is typically the paragraph in which the Fed gives us its thoughts on the overall state of the economy, which has definitely been negatively impacted by COVID-19. Although consumer spending has started to pick up, it remains only about 50% of what it was prior to the pandemic according to comments delivered at a post-meeting press conference by Federal Reserve Chairman Jerome Powell. He also said that the bounce is uneven, with demand for food rising at a much faster rate than travel and hospitality. People aren’t looking to go anywhere. Powell also said business investment could be higher.
The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. (Editor’s note: Emphasis added) The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
Given the impact of the virus, the Fed expects to keep short-term rates at near-zero levels through 2022. So, this decision was widely anticipated, and the timing of future rate increases has everything to do with signs of the economy getting back on track. In the meantime, this is a really good thing for those in the market for home financing because it creates ideal conditions for low mortgage rates.
The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Committee always gives insight into the things they look at in making interest rate decisions. There are the usual suspects like employment numbers and inflation levels, but public health reports are a relative newcomer to the economic analysis scene, and it shows what a different world we’re living in. Vaccines, treatments and spread projections will carry at least as much weight as any employment data.
To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
Some of this gets very technical, but what mortgage professionals should know is that the Federal Reserve purchasing any mortgage-backed securities (MBS) will help sustain low mortgage rates. The higher the demand for MBS, the lower the yield needs to be to attract investors. Lower yields mean lower mortgage rates.
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.
Everyone was in agreement with this policy decision.