The Federal Reserve kept short-term rates where they are when its decision was released at the end of yesterday’s April Federal Open Market Committee meeting. Committee members will also continue the current level of spending on mortgage-backed securities (MBS). Both moves mean good things for mortgage rates.
Read on for an analysis. If that’s TLDR, the bottom line is that it’s a great rate environment whether you’re looking to purchase a home or refinance. You can get started online or give us a call at (800) 442-4383.
My take on the statement 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.
This introductory paragraph has remained pretty much the same since COVID-19 became part of the public consciousness last March. The Fed is committed to utilizing anything at its disposal to try to achieve the highest possible level of employment along with stable prices.
The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, 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.
It’s a new world when businesses and the Federal Reserve are tracking the pace of vaccinations as much as they are order growth, inflation, and balance sheets. However, the Fed sees good news in that the pace of inoculations is picking up and policy seems to be helping economic recovery.
This is normally a quick overview paragraph that touches on a variety of economic health indicators and that’s still there. It’s mentioned that some of the businesses hit hardest by the pandemic have begun a slow rebound. Inflation has picked up, but for now, the Fed thinks this is largely the result of stimulus checks and pent-up demand with a corner possibly being turned in the battle against the virus. In other words, it’s temporary.
Finally, the Fed is happy with the flow of credit to households and businesses at the moment.
The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.
As developments happen with the virus, that’s going to continue to affect the short-term outlook for the economy. We aren’t out of the woods yet and there’s still some risk involved.
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.
This is consistently the longest paragraph in the statement. By my count, the Committee is trying to make about three different points in one spot. My high school English essays taught me to stick to one point per paragraph, and that seems like a good idea here, so let’s roll with it!
First, the Fed would like to see inflation rise a little bit per year at a long-term target rate of 2%. This encourages people to buy now before prices rise, which in turn stimulates the economy and creates jobs. It’s also low enough that money won’t become worthless because prices rise too fast.
One of the ways the Federal Reserve controls inflation is by increasing or decreasing the short-term interest rate at which banks borrow money from each other overnight. The Committee chose to leave that rate at 0% – 0.25%. Expectations are that this doesn’t move anytime soon because inflation had run below 2% annually for some time.
Finally, the Federal Reserve has chosen to spend a metric ton of money on both U.S. Treasuries and agency MBS. The two things you should focus on if you’re in the market for a mortgage are the short-term rate and MBS purchases. Here’s why:
Although the short-term rate isn’t directly correlated with longer-term rates for things like mortgages, there’s a least a tendency to move in the same direction. Additionally, the Fed continues to be a big buyer in the MBS market. The more demand there is for the MBS underlying the most popular mortgages, the lower rates can stay because yields don’t have to be as high to attract a buyer.
Plenty of other things still have the potential to push mortgage rates up, including people moving money out of bonds and into stocks to take advantage of the potential for higher returns. When people are optimistic about the economy, they tend to invest in stocks. If they’re feeling down on the economy, bonds are more popular because of the guaranteed rate of return.
The above notwithstanding, mortgage rates are lower than they would be without the Fed’s high level of MBS purchases.
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 wraps up by stating the things they look at in making their decisions on economic policy. Inflation seems to be the watchword among many analysts with pandemic restrictions starting to lift and people having stimulus money fattening their wallets. For the first time I can remember, inflation is mentioned twice in the same sentence. But the Committee expects the current uptick is short-term.
Developments regarding the virus and labor market conditions as well as global conditions are also taken into account.
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.
The full board was in agreement. There’s harmony in the land of economists.