The Federal Reserve didn’t move short-term interest rates, but they made announcements on another front that might be consequential for those who are looking at current low mortgage rates and trying to decide when to make their move.
While we’ll get into details below, the Fed is considering pulling back on its purchases of mortgage bonds. Because the Fed is a big player in this market, whenever it steps back, it’s not a bad bet that rates will go up. In short, more demand for mortgage bonds means lower rates.
What should you take out of this? If you’re ready, in the short run, there’s not going to be a better time to purchase or refinance. Feel free to start your application online.
My comments are below 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.
It feels like we’ve been dealing with COVID-19 long enough that the Federal Reserve is just playing its greatest hits album every time I see this paragraph, but it’s good to know they’re committed to support.
With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. 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.
The Committee is encouraged by the fact that people are continuing to get vaccinated. However, a rise in cases of COVID-19 certainly threatens the progress that’s been made, so the governors are keeping an eye on it. Although there’s been improvement, sectors like travel and hospitality are still having their struggles.
One thing the Fed has been focused on recently is inflation. While it’s elevated, the Committee has continued to use the phrase “transitory factors.” Basically, that means the Fed governors still believe that this is a result of struggles getting certain sectors up and running in the economy despite demand rebounding. It’s viewed as temporary.
The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.
This short paragraph acknowledges that COVID-19 is running the show and anything the Fed does is a reaction to it. Until the country gets beyond this, it’s hard to give an outlook on the economy.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run 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. Last December, the Committee indicated that it would 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 its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Yet again, this is the longest and most important paragraph of this statement. I wish someone would tell the Fed to break it up a little bit for easier reading, but here we are.
First, the Fed reiterates that the goal for the long term is to have inflation around 2%. The idea is that it’s actually good to have some moderate inflation because it encourages people to buy now rather than moving on with their money. This is the effect of creating jobs and further stimulating the economy.
The Fed is willing to let inflation run above 2% for a while. Before the economy restarted post COVID-19, inflation was very low for a very long time. As such, the governors have chosen not to move short-term interest rates. Although this isn’t directly correlated with longer-term rates for things like mortgages, they do tend to follow a similar pattern.
Of more importance is the fact that the Fed begins to talk seriously about backing off their buying the treasury bonds and mortgage-backed securities (MBS). There are two categories of items that impact your interest rate. One is your personal financial factors like credit score and the size of your down payment.
The other factor to think about is how much demand there is for MBS. When investors buy mortgage-backed securities in high volumes, rates can be lower because it doesn’t take a high yield to attract a buyer. If people generally think the economy is headed in the right direction, they tend to invest in stocks more than bonds because a higher return is offered.
The Fed is the single biggest player in the MBS market right now. When they start to slowly exit the market, rates will more than likely go up because it’s hard to find a buyer or group of buyers to make up that volume. The buying started because housing is such a big pillar of the economy, but everything ends at some point.
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.
The Fed always puts something at the end talking about everything it looks at in making decisions. However, the biggest thing and take out of this is the continued emphasis on public health.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.
All officials were in agreement.
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