The Fed maintains its commitment not to raise interest rates
The Federal Reserve has reaffirmed its intention to limit interest rates, saying the pandemic “continues to weigh on the economy and the risks to the economic outlook remain.”
10-year Treasury bill rates, a benchmark for mortgage loans, fall after the Fed’s announcement, as investor demand for bonds weakened in response to the Fed’s dovish announcement.
The Federal Reserve’s Open Market Committee issued a statement saying today that it intends to keep short-term rates, over which the Fed has direct control, near 0% until unemployment drops and inflation “is on the on track to moderately exceed 2% for a while ”.
While the Fed does not have direct control over long-term rates, it can influence them by buying government bonds and mortgage-backed securities. The Fed has said it will continue to buy at least $ 80 billion in treasury securities and $ 40 billion in mortgage-backed securities each month “until further substantial progress is made” to meet employment and inflation targets.
“The trajectory of the economy will depend significantly on the evolution of the virus, including progress in vaccination,” the committee said in a statement. “The current public health crisis continues to weigh on the economy and risks to the economic outlook remain.”
The Fed wants to see “maximum employment” and inflation at 2 percent over the long term.
“With inflation consistently below this long-term target, the Committee will aim to achieve inflation moderately above 2% for a period of time so that inflation averages 2% over time and expectations are Long-term inflation remains firmly anchored at 2%. The Committee hopes to maintain an accommodative monetary policy until these results are achieved. “
Before the pandemic, the Fed had been steadily increasing the short-term federal funds rate since late 2016, and long-term rates had largely followed suit. When the pandemic struck in March 2020, the Fed cut short-term rates close to zero. Although long-term rates hit historic lows in 2020, they have skyrocketed in anticipation of an economic recovery that would raise concerns about inflation.
In a press conference, Federal Reserve Chairman Jerome Powell said the Fed was monitoring housing markets “very carefully,” which he said despite tight stocks and rising prices, are much healthier than on the eve of the 2007-09 global financial crisis.
One of the main differences is that before the pandemic, households “were in very good financial shape”. Also, said Powell, most of the people who got mortgages in recent years had “pretty high credit scores. There weren’t the subprime, low-doc, no-doc loans that were a defining feature of the housing bubble.
“There is no question that house prices are going up, so we are watching that carefully. Part of that is because demand is clearly strong and there just isn’t a lot of supply right now. Manufacturers are struggling to meet demand, clearly. The stocks are extremely low. We all hear these stories.
“And if you’re an entry-level home buyer, that’s a problem, because it’s going to be a lot harder for people to get that first home, and that’s a problem. It’s part of a strong economy, with people who have money to spend and who want to invest in housing.
“So in that sense it’s good. This is clearly the strongest housing market we have seen since the global financial crisis, and I hope that over time home builders can respond to this demand and increase supply, and that workers will return to work in this sector. .
“It’s not an unalloyed product that prices are going up so much, and we’re watching that very closely. However, I don’t see the kind of financial stability issues that really reside in the housing industry. A large number of financial crises – in all Western countries that have suffered from them over the past 30 years – have affected housing. We really don’t see that here. We don’t see bad debt and unsustainable prices. “
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