Federal Reserve Press Release In Plain English – April 2020
The response to COVID-19 has caused shock waves across the world. The mitigations put in place to limit negative public health effects have had an extremely detrimental effect on economic activity. It’s this landscape that the Federal Reserve confronted at its April meeting.
There can be no doubting that the economic picture doesn’t look very good, and many Americans are facing hard financial decisions. Nevertheless, it’s not all doom and gloom. If your clients are working right now and in the position to do so, extremely low interest rates make it a very attractive time to purchase or refinance a home. You have the opportunity to help your clients feel secure in their finances during this time of uncertainty. Take advantage!
The Federal Open Market Committee’s April press release is below. My comments 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.
In other times, the Fed would start by taking a look at the state of the economy. In this statement, it has taken the unusual step of beginning with a commitment to leave no stone unturned when it comes to responding to the current economic situation and fostering an environment in which both the Committee’s goals for hiring and controlled inflation are most readily achieved.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.
Now onto the elephant in the room. The Fed says that the impacts of the virus on the economy are far-reaching. You don’t have to look very far to see this: Unemployment claims have reached their highest level since tracking began. It was also reported this week that gross domestic product, a key measure of economic health, went negative in the first quarter.
Because so many people are working from home and there’s no nonessential travel, there’s no demand for oil and prices have essentially fallen off a cliff. It’s also become harder for consumers and businesses to obtain credit and loans. These are due to changes in lending policies that have been forced by either business decisions or the fact that some lenders might be struggling to alter their businesses in light of this evolving situation.
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. 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.
The Fed stipulates that everything is sort of controlled by the path of the virus and that it’s impossible to give a specific timeline for how long these economic impacts might continue. The Committee chose to leave short-term interest rates in a range between 0% – 0.25%. While there’s not a 1:1 relationship between these short-term rates and the longer-term ones for things like mortgages, it’s fair to say they tend to move in the same direction.
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. To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support 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 market conditions and is prepared to adjust its plans as appropriate.
This paragraph is a lot to digest, so let’s break it down carefully. The Committee begins by outlining what it looks at when assessing the health of the economy. Most of this is pretty standard: labor market conditions, where inflation is as well as the direction it’s expected to take in the future, and developments in other global economies. What’s different is an emphasis on looking at health data and the trajectory of the virus. In a similar way to how the virus has affected the rest of us, this puts the Fed in somewhat uncharted territory.
The Committee also takes a second to outline the arsenal of tools it’s using to battle the economic fallout from the virus. Among those listed, it’s buying plenty of mortgage-backed securities. This is a particular boon if you like low mortgage rates. When a buyer like the Fed steps in to the market and buys large amounts of MBS, that means the yield on the security doesn’t have to be as high in order to attract a buyer, which has the effect of keeping rates low. The commentary on overnight lending and repurchase agreements is a little bit in the weeds, but it has the effect of making access to credit and lending easier by providing more liquidity in the market.
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.
The voting members of the FOMC all agreed on this policy direction.