July FOMC Announcement: No Rate Change

July 29, 2020

In the just-released FOMC statement, the Fed announced no change to the Fed Funds target rate, leaving it in the range of 0.00% to 0.25%. Today’s decision was expected by markets and had been communicated in advance by Chair Jerome Powell and many of the Fed Governors individually.

Just like the June 10 meeting, this meeting was not going to be about the Fed Funds rate policy anyway. Now, the focus will be what the Fed Chair may discuss at the follow-up press conference regarding additional measures to alleviate the impact of the pandemic.

Specifically, great attention will be paid to comments about plans for “yield curve control” (YCC). This refers to a potential Treasury bond purchase program where the Fed begins bond buying in order to control market yield premiums on longer maturities (the Fed more typically operates open market purchases in maturities less than 2 years). Special focus will be on the benchmark 10-year maturity, which acts as a barometer for 30-year fixed-rate mortgage pricing. It should be noted that other countries’ central banks are operating such programs, notably Austrialia recently began this.

We can also expect to hear guidance and expectations about COVID-19 relative to employment, inflation stabilizing, and the assessment of the Fed’s extraordinary measures that began in March. The immediate future path of these critical factors is still somewhat unclear and markets will carefully consider what the Fed says today. This creates the potential for volatility in both the equity and bond markets. It’s less clear what the impact will be on mortgage rates.

What’s Next?

The most important impact for mortgage rates at today’s press conference is to listen for guidance around the Fed considering “Yield Curve Control” (YCC) and continuing plans for MBS bond purchases. If the Fed is going to cap the yields on term Treasury bonds, that could have a meaningful impact on the expectations for lower mortgage rates.

Additionally, any announcement regarding the Fed’s MBS bond purchase plans can also have an impact. If the Fed were to announce a shift to purchase a larger amount of 2.00% 30-year MBS coupons, that could result in more lenders getting comfortable with publishing 30-year fixed-rates below 2.750%. This may happen depending on how critical the Fed sees the need to further support the housing market, which is traditionally a leader in the recovery from recessions.

What Do Borrowers Do Now?

For borrowers looking to either purchase or refinance, current mortgage rates are at or very near all-time historic lows. The opportunity to secure a rate should not be taken for granted. And borrowers should give consideration for lenders track records dealing with capacity issues and increasing turn times.

We have been very fortunate here at Waterstone Mortgage that our Processing and Operations staffs have maintained industry-leading closing times, despite ongoing record-breaking volumes. I can say this even as our closing time has increased slightly, because that increase has been only a fraction of what the rest of the industry is seeing.

A qualifying purchase borrower with a property at stake should work closely with their loan originator to rate lock the mortgage financing that fits their homeownership goal as soon as that’s determined. On refinances, the closing date expectations should be carefully managed to accommodate the current closing calendar timing and capacity.

Whether or not interest rates end up lower at some point, in the timespan a rate lock decision is required of a borrower – this market environment presents timing and capacity issues that may even outweigh the risk of higher rates. Borrowers should understand those factors.