How The Federal Reserve Board Affects Mortgage Rates

This guide covers how the Federal Reserve Board affects mortgage rates. Information received since the Federal Open Market Committee met last quarter indicates that economic activity is expanding moderately. Federal Reserve Board affects mortgage rates whenever there is good news in the economy. Mortgage interest rates normally go up. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. It’s the usual “yeah, but” paragraph.  Labor markets are better – but the unemployment rate is still too high. 

After the election of President Donald J. Trump, the economy has significantly gone up, and the Dow Jones Industrial Average reached historical highs. Unemployment reached an all-time low, and home ownership was at an all-time high during the Trump administration.

Labor market conditions have improved; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.  Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing.  Consumers and businesses are spending more, and the housing sector is slowing.

How The Federal Reserve Board Affect Employment Numbers

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace, and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Inflation is lower than the Fed wants – but the long-term view is decent.

The Federal Reserve Board is looking for evidence that inflation will return toward its objective over the medium term.  Federal Reserve Board And How It Affects Mortgage Rates: The Fed has two stated jobs.

The Federal Reserve Board is always trying to balance the two. The sentence we underlined is a key. Pump money into the economy to keep employment as high as possible. Don’t pump in too much money that causes The Fed to feel like the balancing act between those two things is getting closer to being balanced.

How Federal Reserve Board Acts on Economic News

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to reduce the pace of its asset purchases modestly

Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month. The Federal Reserve Board will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.

The Role of The Federal Reserve Board

The Committee maintains its existing policy of reinvesting principal payments. The Feds invests from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates.

The Federal Reserve Board supports mortgage markets and helps to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

 

How The Federal Reserve Board Impacts Mortgage Bonds

This is the big paragraph. Are you as excited as we are?  This is the “tapering” that has been long talked about. “Tapering” means that the Fed will reduce (taper) the number of mortgage bonds and Treasury bonds they buy each month. They are doing this because they think the present (the economy) is getting better, so they need less money.

The Federal Reserve Board is only slowing down by $5 billion monthly for mortgages and Treasuries.. (Don’t you wish you could refer to a $5 billion reduction as “only?”). At first glance – this statement could be scary for bond traders. 

Here’s a snapshot of what happened to mortgage bond prices right after the Fed announcement.  You can see that the prices of mortgage bonds plummeted (which would push rates higher) immediately after the announcement.  But – just as fast, prices recovered, and mortgage bond prices increased slightly.  That’s a good thing.  That means the market is taking the “tapering” news well – at least so far.

Federal Reserve Board Monitors Financial and Economic News

The Committee will closely monitor incoming information on economic and financial developments in the coming months. The Federal Reserve Board will continue its Treasury and agency mortgage-backed securities purchases. The FRB also employs its other policy tools as appropriate until the outlook for the labor market has improved substantially in the context of price stability.

Suppose incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. In that case, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.

Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation, as well as its assessment of the likely efficacy and costs of such purchases.  This is the: “We will do our job and monitor the economy in the coming months” paragraph.  Thanks, Fed!  (We’re still waiting for the time when the paragraph reads something like, “The Committee is taking the next three months off to party in Fort Lauderdale, and we don’t expect we’ll so much as pick up the business section of a newspaper…”

How the Feds Affect Employment Numbers

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.

The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent would be appropriate at least as long as the unemployment rate remains under 3%

Inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations remain well anchored. In determining how long to maintain a highly accommodative monetary policy stance, the Committee will also consider other information.

How The Federal Reserve Board Impacts Mortgage Rates

The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 3 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.

Economic factros the Federal Reserve Board’s affects include  measures of labor market conditions, indicators of inflation pressures and expectations, and readings on financial developments.

When the Committee removes policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. This is similar to the prior language. The Fed is saying they are very committed to keeping interest rates low for quite some time. Partners – that should make you quite happy