The Federal Reserve had its June meeting yesterday. They decided to keep short-term interest rates the same, but of far more interest this time around were the forward economic projections.
Essentially, this confirms what we already knew. Nothing regarding the economy has happened in the way the Federal Open Market Committee (FOMC), or anyone else for that matter, would like it to. The silver lining to this is that the Federal Reserve wants to keep rates low for consumers. Given that, short-term rates will likely remain very low through 2022, according to projections. This is a very good thing if you’re in the market for a mortgage. If you think you might be ready to purchase or refinance, feel free to speak with one of our Home Loan Experts.
An analysis of the phone Federal Reserve statement is below. My comments are 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.
The U.S. central bank recognizes that there is a crisis confronting the economy, and as such, extraordinary times require extraordinary measures. The Committee is acknowledging the need to leave no stone unturned.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The purpose of this post is to translate what the Fed says into language that’s commonly understood. However, when it comes to the current economic situation, I don’t think there’s any translation needed. Many people have lost their jobs. Because people haven’t been traveling as much, oil prices are down, which is really slowing inflation. Finally, people are keeping a tighter grip on their purse strings given the uncertainty, which in turn slows down spending that could otherwise jumpstart the economy. With that said, policy decisions supporting businesses are helping.
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. 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.
The federal funds rate was maintained at its current 0% – 0.25% level. Not only that, the Fed reaffirmed its previous guidance that the rate will remain at this level until the Fed feels the economy has sufficiently recovered somewhat normal footing. To judge this, they’ll be looking at both employment and inflation. Based on the projections put forth by the Committee to go along with this statement, they don’t expect the rate to rise to any significant level before 2022.
The projections also give an idea of the scope of the challenge facing the U.S. As an example, the economy is expected to shrink by 6.5% this year in terms of gross domestic product. GDP is expected to rebound by 5% in 2021 and 3.5% in 2022, but it’s important to remember that rebounds are bigger when you’re starting from a lower level. The unemployment rate for 2020 is anticipated to be 9.3% and reach 5.5% in 2022.
The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
There’s always a paragraph in these statements that says what the Federal Reserve will look at for guidance in making future policy decisions. However, what’s relatively new and unique to our times is the reference to public health caused by COVID-19. In addition to the usual indicators on inflation, employment and business conditions in general, they’ll be monitoring things like vaccine development and potential second waves of infection in formulating monetary policy.
To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
If being cooped up inside your current home these past few months has made you itch for new digs or if you want to refinance to save some money, this paragraph should make you very excited. The Federal Reserve’s promise to buy treasury securities and residential mortgage-backed securities (MBS) should help keep mortgage rates low. As demand for MBS increases, the yield doesn’t have to be as high in order to entice investors to buy. Because of this, mortgage rates tend to fall with greater MBS demand.
Some of this paragraph is super inside baseball, but it can basically be summed up that the Fed will continue some programs it has in place to keep credit and loans available along with making borrowing relatively cheap for banks. Because of the cheaper funds, they can pass along those savings to customers in order to stimulate borrowing, which stimulates the economy.
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.
Everybody was in agreement this time around!
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