September FOMC Announcement: No Rate Change

September 16, 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. Also released are the updates to each Fed Governor’s projection of the fed funds rate going forward over the next three years. These so-called “dot plots” give analysts guidance into how to forecast future rate changes, even as economic conditions change.

Like the July 29 meeting, this meeting was not going to be about a change to the Fed Funds rate. The focus will be on how much flatter the dot plots have become (a metric on the pledge for fed funds to remain “lower for longer”) and what the Fed Chair will discuss at the follow-up press conference.

In light of the new policy framework Chairmen Powell announced at last month’s (virtual) Jackson Hole conference, attention on his comments today will be on any comments describing how the Fed will pursue “average inflation targeting” and responding to “shortfalls” from maximum employment. This new policy approach to the the Fed’s mandates is  a significant change, an average inflation metric will be used where a single point had always been the reference.

That may not sound like a big difference to the layperson’s ear, but it gives market participants a whole new approach to consider. Markets are looking for more information, even despite that in Powell’s August speech he said, “To an extent, these revisions reflect the way we have been conducting policy in recent years.”

Take a bow if you were already thinking that to yourself. The more popular quote from Powell’s speech was that the FOMC is “not even thinking of thinking of thinking about raising rates.”

Powell may also shed light on yield curve control (YCC), or increases in QE bond purchases in order to stimulate the economy rather than only supporting it. But before we hear those plans we can expect to hear Powell call again for more fiscal support to address the impact of COVID-19 relative to employment and economic performance in the near term. With the election looming ever closer, it’s not at all certain if the legislature will heed this advice. But the call will come regardless.

What’s Next?

With the Fed very committed to low rates into at least 2022, the bond markets are more likely to be influenced by economic outcomes, the rate of COVID-19 infections, and the deployments of effective vaccines then they normally would be by changing Fed expectations. But sentiments in the bond markets can change quickly. And with mortgage rates still very close to all-time historic lows, it’s never a good time to become complacent in terms of financial risk.

The next FOMC meeting is November 5, two days after the election. Leading up to that event the political rhetoric will certainly dominate headlines. Many bond analysts are suggesting the bond markets, and therefore mortgage rates, will continue at current levels until then.

What Do Borrowers Do Now?

For borrowers looking to either purchase or refinance, they should appreciate that current mortgage rates are at or very near all-time historic lows. And borrowers should give consideration for a lender’s track record dealing with capacity issues and increased 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 times have 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.