Federal Reserve Commits To Low Interest Rates
The Federal Reserve Board’s Federal Open Market Committee committed today to keep the target range for the federal funds rate at 0 to one-quarter percent. The committee targets keeping those numbers until maximum employment is reached and inflation has risen to 2% and is on track to moderately exceed 2% for some time. Expectations are the rates won't change through 2023.
That’s unless there are significant changes in the economy. The Federal Reserve issued a statement saying, “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 statement added, “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.”
Mike Fratantoni, the chief economist for the Mortgage Bankers Association, supported the Fed’s action. “The Federal Reserve recommitted today to keep short-term rates low and re-upped their plans to buy [mortgage backed securities] and longer-term Treasuries at the same pace as in recent months. The Fed’s new framework to keep rates low until inflation visibly rises beyond their 2% target will mean that liftoff from zero will occur later than in the last cycle – allowing the unemployment rate to fall even further than the 50-year low we saw in February.”
Fratantoni added, “Recent key economic data – specifically retail sales and industrial production – indicate that the pace of the economic recovery slowed in August, likely due to the end of some of the fiscal supports to households and businesses. However, the housing market continues to be quite strong, with home sales and home prices growing, and the pace of construction quickening. Lower rates are definitely helping to support the current stretch of strong home purchase demand, while also continuing to generate robust refinance volume.”
Yahoo Finance reports rates should stay low through at least the end of 2023. “Updated forecasts have the Fed now seeing 3.7% contraction in GDP with the unemployment rate reaching 7.6% by the end of the year,” the article stated, adding the Fed’s policy statement shows pandemic will “continue to weigh heavily on economic activity.”
Federal Housing Financing Agency head Mark Calabria testified before Congress today the mortgage market still faces some challenges. “Responding to substantial federal support in the form of [mortgage backed securities] purchases by the Federal Reserve, spreads between the current coupon MBS and 10-year U.S. Treasury have fallen below levels observed at the beginning of 2020, at least for the to-be-announced market. On the other hand, spreads between the 30-year fixed mortgage rate and the 10-year Treasury yield remain high. These primary market spreads have declined, but they have not yet returned to pre-crisis levels.”
In his testimony, he added, “However, current mortgage rates reported by Freddie Mac and the Mortgage Bankers Association are at the lowest point on record in the series dating back to 1971 and 1990, respectively. [My agency] continues to work with [Freddie Mac and Fannie Mae] to ensure that borrowers can access new purchase and refinancing opportunities at historically low rates. This includes the policy of treating as current borrowers in forbearance who continue to make payments. In addition, borrowers’ credit history will not be negatively impacted by entering a COVID-19 related forbearance plan.”