The Federal Reserve kept short-term interest rates where they were at near 0%. Because short-term rates tend to follow the same direction as mortgage rates, this supports the extremely low mortgage rates we’ve been seeing for quite a while now.
If you’re in the market to buy or refinance a home, it’s a really good time to do so if you can. Feel free to get started online!
Beyond that, we got some more detail out of this release than what the Fed normally provides. My analysis is 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.
The Federal Reserve is reaffirming its commitment to the U.S. economy, and by extension, Americans. The goal is to have as many people employed as possible and have just the right level of inflation – not too little, not too much. The main challenge for the Federal Reserve right now is to keep the economy as accommodative toward hiring as possible.
The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
A lot has happened this year, but all anyone in the markets is focused on right now is COVID-19. It’s making its presence felt and the economy won’t really be back on its feet until we can get that under control.
There’s also a bit of a rundown of key factors here: Economic activity has picked up and employment is making a climb, but it’s not near where we were in February. The Federal Reserve is still keeping an eye on inflation, but it thinks that weakness is at least partially due to low oil prices. No one is going anywhere, so demand is weak, and gas is traditionally a big driver of rising prices.
Finally, they touch on the fact that credit for businesses and households should be able to flow freely in part because the Fed has lowered rates and taken other actions to try and stimulate the economy.
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.
Again, it’s all about the virus. There’s nothing the Fed says here that you haven’t heard elsewhere, but the economic recovery largely depends upon how fast we can get people vaccinated and comfortable going out in public. Entire industries are counting on the virus coming under control in the near future.
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, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
It seems to me that more gets put into this paragraph with every passing month. I’m going to try to break it down point by point.
First, the Federal Reserve kept short-term interest rates where they currently stand at between 0% – 0.25%. They plan to keep short-term rates low until such time as inflation averages 2% on an annual basis. Because inflation has run so low for so long, they’re willing to let it run higher for a while to play catch-up.
Ideally, the Federal Reserve likes to see inflation running around 2% because if that happens, it encourages spending now before prices go up, something that has the effect of stimulating the economy. Inflation is nowhere near 2% right now, so the Fed doesn’t plan on moving the federal funds rate above the current level before 2023, according to its most recent projections.
In addition, it plans to plow $40 billion into agency mortgage-backed securities (MBS), creating more demand in that market. That in particular is good for interest rates on mortgages because these are tied to the yield on MBS. In short, the more demand there is for MBS, the lower the yield can be and still attract a buyer. This leads to lower mortgage rates.
Mortgage rates also tend to follow the direction of the 10-year Treasury Yield, so that also could help interest rates stay at lower levels. However, this effect is more indirect.
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.
In a typical release (i.e. before 2020), this is the paragraph in which the Federal Reserve typically tells you the information they’re looking at in making their decisions. While that’s still the case, what’s not normally here is any mention of public health. Now it’s the #1 item listed.
Secondly, there’s a bit of an extra emphasis on the fact that committee members are prepared to adjust course as new developments manifest. Everything about this year is fluid.
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.
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