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Fed says Zero – Rates Improve

June 15, 2020

Last Week in Review: Fed says Zero – Rates Improve

About every six weeks the Federal Reserve meets and decides whether to make potential changes to the Fed Funds Rate, an overnight lending rate. They also release their Monetary Policy Statement which includes the reasoning for their action or inaction.

This past week, it was Fed Week and while they didn’t change rates or offer any big surprises it was the actual “zero” which ultimately hurt Stocks and helped Bonds and home loan rates.

The Fed said they are likely to keep the Fed Funds Rate at the current rate of zero, potentially through 2022.

Why would the Fed not hike rates for possibly 18 months or more?

It’s important to understand the Fed’s dual mandate and primary functions: to promote full employment and manage price stability (inflation). At the moment unemployment is highly elevated at 13.5% and it will take time for the labor market to get back to the 3.5% we saw just a few months ago.

The other reason is inflation or price stability. At the moment, inflation is running well below the Fed’s target of 2.00% and is likely to do so for the foreseeable future. With inflation currently no threat, there is no pressure for the Fed to raise rates.

What does this mean for mortgage and housing? Mortgage-backed securities are Bonds which influence home loan rates. Inflation is the main driver which pushes them higher or lower. If inflation indeed remains low as the Fed is currently forecasting, then home loan rates will remain relatively low for the foreseeable future.

Supporting the notion for low inflation in the near-term is the incremental re-opening of states and businesses. This will make consumer demand return more slowly as well.

In addition to the status quo on rates, the Fed also said they will continue to buy Treasuries and mortgage-backed securities on a daily basis to “sustain smooth functioning” of the markets. This action will also help keep home loan rates lower for longer.

The bottom line: The backdrop for housing and the economy continues to be bright. Inflation is low, jobs are returning, consumers are eager to spend, housing demand is increasing, and we should expect the Fed, Treasury, and administration to do whatever it takes to underwrite a full economic recovery.

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