The 10 brilliant minds who make up the Federal Reserve met yesterday to once again discuss the state of the economy and determine the action needed by them to aid a struggling American economy. The Fed funds rate is one way the Fed uses to regulate the supply of money to the US economy.
No surprise, they decided to keep targeting the Fed funds between 0-.25%. In bigger news, they announced they would spend another $1.2 trillion buying mortgage-backed securities and other debts from Fannie Mae. Immediately following the announcement, mortgage rates dipped about .375 points to under 5% on 30-year fixed loans.
That’s why many of you Quizzlers saw a mortgage rate alert on your homepage – we’re giving you the hook up! And you know who to call to help you out with your mortgage, right? RIGHT?! (hint, hint)
The following is an official press release from the Fed regarding its decision today, and a translation (for the rest of us) of all the financial jargon by Bob Walters, Chief Economist for Quicken Loans:
For immediate release
Now
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
The Federal Open Market Committee (10 people who decide things for the banking system), also known as the “Fed”, is seeing that the economy is getting worse. Job losses = less spending by consumers. Businesses can’t borrow = less spending by businesses.
Despite all that bad news, the Fed feels that, over time, all the money they have pumped into the economy will start to turn the economy around.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
Given that the economy is essentially a train wreck, and given that people will be spending less, and given that when people spend less companies have to lower prices – the Fed expects that prices (inflation) will remain low. In fact, the Fed is more worried that prices might actually fall (which, believe it or not, is also bad for an economy).
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.
The Fed will keep short term rates (the rates at which banks borrow from each other) at 0%. That was no surprise.
What was a surprise (and a happy one for those of us at Quizzle & Quicken Loans), was that the Fed decided to go on a shopping spree that would make Donald Trump blush. The Fed decided to:
• Purchase an ADDITIONAL $750 billion of mortgage backed securities (on top of the $500 billion they agreed to buy last November). THIS is the decision that caused mortgage rates to fall significantly.
• Purchase an additional $100 billion of Fannie Mae and Freddie Mac debt. This will allow those companies to buy up more loans – which will also be good for mortgage rates.
• Purchase $300 billion of long term Treasury securities. This will drive down government rates.
o So – in sum, the government just agreed to spend $1.2 TRILLION. They will be putting it on their credit card. (How would you like to get that bill?!)
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