What Mortgage Professionals Should Know About The Federal Reserve’s June Meeting
When it held its meeting yesterday, the Federal Reserve’s Federal Open Market Committee (FOMC) was blunt about the challenges facing the American economy. Nothing looks very good right now. Still, while acknowledging the gravity of the situation, it’s fair to say that there were some silver linings, in particular for mortgage professionals and the clients they serve.
Short-term interest rates are expected to remain right around where they are through 2022. Given that, it’s a great time to get a mortgage at an affordable rate. Use this message to impart confidence to your clients while being sensitive to their individual situations.
The full press release is below. My analysis is 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.
You’ve likely lost count of the number of times you’ve heard someone say we’re in an unprecedented situation, but that’s the reality of the world we find ourselves in. The Federal Reserve is pledging to do everything it can to support the economy in this time of turbulence.
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 have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
We know things aren’t what they were a couple of months ago, but the Fed takes this paragraph to acknowledge the depth of the situation. Job losses and decreased consumer spending and other economic activity are of particular concern to the Committee. It also has an eye on inflation that was already persistently weak before this current crisis. Still, policies from both the Fed and lawmakers are at the very least helping the 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 Federal Reserve chose to leave short-term interest rates right where they are. In addition, the FOMC again stated that it is willing to leave that policy in place until it feels like the economy is well on its way to recovery. The projections don’t call for any significant increases in rates until 2022 at the very earliest.
It’s worth taking a second to go through a couple of the other metrics the Fed is looking at. GDP is expected to drop by 6.5% in 2020, before rebounding 5% in 2021 and 3.5% in 2022. But remember, it’s easier to have a bigger growth number when you start at a lower level. As far as unemployment, it’s anticipated to be 9.3% in 2020 and still be at 5.5% in 2022.
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.
It’s normal for the Federal Reserve to give us an insight into what it looks at in terms of economic projections, but what’s different this time around is the mention of public health. Things like vaccines and second waves of infection or lack thereof (hopefully), could play a major role in how quickly the economy recovers. The Fed will be paying close attention to these in addition to the usual suspects of unemployment rates, business conditions and how quickly prices rise.
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.
Although a lot of this paragraph is very technical, something that anyone in the mortgage industry and their clients should be very excited about is the buying of residential mortgage-backed securities (MBS). Essentially, when there are more buyers in the MBS market, the yield doesn’t have to be as high to attract demand and mortgage rates remain lower.
The Fed also vowed to continue with a couple of policy programs that are intended to keep the cost of borrowing low for lenders so that they can pass along the savings and keep borrowing costs low for consumers and businesses.
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.
All the Committee members agreed!