On Sunday, the Federal Open Market Committee (FOMC) voted to lower the target range for the federal funds rate to zero to 1/4 percent in light of the Coronavirus pandemic, in addition to launching a $700 billion quantitative easing program to further protect the nation’s economy from the impact of the virus. The quantitative easing will take the form of $500 billion in Treasurys and $200 billion of agency-backed mortgage securities.
“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,” said the FOMC in a statement. “This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric two percent objective.”
"The Fed’s further rate cut to counter COVID-19 is credit positive for many U.S. structured finance sectors, such as mortgage-backed securities and consumer asset-backed securities, because it will increase debt affordability for borrowers and support liquidity and asset prices, among other benefits," said Moody's Managing Director Jian Hu. "For collateralized loan obligations, although lower short-term rates will decrease excess spread, a credit negative, lower rates will also cut leveraged loan borrowers’ payment obligations and revive dormant LIBOR floor benefits in CLO weighted average spread, both credit positives. The extent of the rate cut’s credit effects will depend on the length and severity of the coronavirus outbreak.”
Members of the FOMC voting in favor of the rate slash were Chairman Jerome H. Powell, Vice Chair John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari and Randal K. Quarles. Voting against the measure was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses, but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent.
“By the end of last week, markets across the board were showing increasing signs of stress, with unprecedented volatility and widening spreads,” said Mortgage Bankers Association
Senior Vice President and Chief Economist Mike Fratantoni. “Today’s dramatic action by the Fed, lowering rates to zero, buying Treasuries and MBS, and encouraging banks to go to the discount window, will significantly reduce stress in the system. MBA expects these actions will lower mortgage rates, helping homeowners save money through refinancing, and thereby, providing a boost to the broader economy.”
Dr. Lawrence Yun, chief economist for the National Association of Realtors (NAR), said: “The monetary policy change is the same one applied a decade ago during the Great Recession - the lowest rates combined with quantitative easing. This is an all-out measure to prevent a recession and fight the fear that is blanketing the country. It is the right policy, since the policy can easily be reversed should a vaccine be discovered or the virus goes away."
Yun continued, "During the last recession, real estate was on wobbly ground with loose lending and too much supply. Today, there is no sub-prime lending and too little supply. The real estate market will hold on much better.”
The FOMC’s rate cut was just the latest means to ease economic burdens as the number of reported cases of the Coronavirus grows.