While it was a volatile week for stocks, the mortgage market remained relatively calm. Wednesday’s Fed meeting contained favorable news for bonds, and mortgage rates ended the week lower.
Since the middle of March, the Fed has bought over $2 trillion in Treasuries and mortgage-backed securities (MBS) to help support the economy and to maintain market stability, but it has been slowly reducing the quantity of its purchases each week. Wednesday, the Fed announced that going forward it will buy bonds “at least at the current pace,” signaling an end to the gradual reductions. This unexpected increase in future demand for MBS from the Fed helped push mortgage rates lower.
In addition, the Fed held the federal funds rate close to zero and projected that there will be no rate increases through at least 2022. Fed officials forecasted that the economy will shrink 6.5% in 2020 but will then grow by 5.0% in 2021 as it bounces back from the effects of efforts to fight the pandemic. Fed Chair Powell repeated the message that the Fed will use all of its tools for as long as needed to support the economic recovery.
One reason that Fed officials are comfortable with maintaining loose monetary policy is that the reduced economic activity resulting from the pandemic has caused a sharp decline in inflation. In May, the core CPI price index, which excludes the volatile food and energy components, was just 1.2% higher than a year ago, down from an annual rate of increase of 2.4% in February. Tame inflation has helped keep mortgage rates low.
Looking ahead, investors will continue to watch for news about medical advances, government stimulus programs, Fed monetary actions, and plans for reopening the economy. Beyond that, Retail Sales will be released on Tuesday. Since consumer spending accounts for about 70% of all economic activity in the US, the retail sales data is a key indicator of financial conditions. Housing Starts will come out on Wednesday.
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