The Fed just cut its benchmark rate to zero for the first time since 2008. Here’s what it could mean … [+]
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Most experts predicted the Federal Reserve would reduce the federal funds rate at its scheduled meeting this Tuesday, but the Fed pulled the trigger early, dropping its benchmark to zero to 0.25% early Sunday evening. It’s the first time the funds rate has been this low since 2008 and the second time the Fed has cut rates this year. The bank reduced its rate from 1.5% to 1% just two weeks ago.
The move—as well as the Fed’s promise to purchase at least $700 billion in bonds and mortgage-backed securities—is the latest in the bank’s attempts to stifle the effects the coronavirus outbreak is having on the U.S. economy, according to Federal Reserve Chairman Jerome Powell.
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” Powell says. “In light of these developments, the committee decided to lower the target range for the federal funds rate.”
Alan Rosenbaum, the founder of New York City-based mortgage lender GuardHill Financial, says that though he expected a rate cut later this week, the sudden, late-Sunday announcement was a “startling” and “aggressive” move on the Fed’s part.
He also says the cut could cause mortgage rates to drop in the coming days. Just two weeks ago, mortgage rates hit their lowest point in 50 years, according to Freddie Mac, bottoming out at 3.29%.
According to Rosenbaum, they may hit those historic lows once again. “Expect mortgage rate to dip a little,” Rosenbaum says. “But I would advise consumers not to wait on it. Rates are very attractive now.”
The Fed’s purchase of billions in mortgage-backed securities should also help bolster the mortgage market and keep interest rates low, according to Robert Dietz, the chief economist for the National Association of Home Builders.
“For housing markets, the purchase of $200 billion of mortgage-backed securities was particularly important given the rise in mortgage interest rates last week that signaled a drop in investor ability or desire to purchase MBS,” Dietz says. “This action will help stabilize mortgage rates over the coming week—although more purchases of MBS will likely be required.”
Mortgage rates ticked up slightly last week, jumping to 3.36%, according to Freddie Mac. While investors avoiding lower-yield MBS played a role, so did surging refinance demand. As lenders saw refinance applications spike (up 79% in just one week), many were forced to raise their rates and even turn away customers entirely.
Fortunately, that burden may soon be lighter. Danielle Hale, the chief economist for Realtor.com, says the Fed’s latest move—as well as CDC-recommended social distancing—will likely dampen that consumer-side demand and ensure low rates remain a bit longer.
“By acting swiftly to tamp rates down and pledging ongoing support, the Fed may have flattened the curve in the housing market, diminishing some of the urgency households may have felt to buy or refinance now less they miss out and keeping demand strong further into the future,” Hale says.
Still, she says, only time will tell.
“Because monetary policy is not a quick tool, it will be some time before we know whether this action was sufficient to sustain economic growth,” Hale says. “But it’s a large and coordinated move that will put households, the housing market, businesses and the financial sector on better footing.”