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Powell and the Fed have done their part to keep mortgage rates low

·4 min read
Powell and the Fed have done their part to keep mortgage rates low
Powell and the Fed have done their part to keep mortgage rates low

Though the economy is strengthening now, after the hammering it took from COVID-19, the Federal Reserve says it's not ready to end the pandemic-fighting policies that have contributed to today's super-low mortgage rates.

Fed Chairman Jerome Powell (pictured) and his central bank colleagues announced on Wednesday that they'll keep holding a key interest rate near zero, and will continue to buy Treasury bonds and mortgage-backed securities to help the economy.

"Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain," Fed policymakers say in a statement.

Mortgage rates recently slid back toward their all-time lows, and the Fed's announcement will keep the pressure off those borrowing costs. House shoppers and homeowners considering refinancing should have more time to score historically low rates.

The Fed wants to feel more confident about the recovery

Facade on the Federal Reserve Building in Washington DC
Paul Brady Photography / Shutterstock

The Federal Reserve has two goals, under its so-called dual mandate. It wants to see maximum employment and stable prices.

The economy has been displaying encouraging signs that it's shaking off its COVID-19 funk and is moving toward the Fed's objectives. But the Fed needs to see "substantial further progress," Chairman Powell said during a news conference Wednesday.

The government's employment report for June showed a better-than-expected 850,000 jobs were created last month, but the jobless rate made a surprising rise — from 5.8% to 5.9%. Still, Powell is upbeat.

"This is a very strong labor market," he told reporters. "If you look at the number of job openings compared to the number of unemployed, we’re clearly on a path to a very strong labor market, with high participation, low unemployment, high employment and wages moving across the spectrum."

The chairman was equally optimistic about inflation, even though prices last month were up a steep 5.4% from a year earlier. Powell says inflation should subside once a number of pandemic-triggered supply shortages sort themselves out.

"If you look at the most recent inflation report, what you see is that it came in significantly higher than expected, but essentially all of the overshoot can be tied to a handful of categories," he said, citing new and used cars, airplane tickets and hotel prices.

The impact for mortgage rates

United States Treasury Savings Bonds
larry1235 / Shutterstock

The Fed's decision to hold its key interest rate — the federal funds rate — close to zero will maintain the low-rate environment that has helped hold down mortgage rates. Projections released in June indicated policymakers are not likely to raise the federal funds rate before 2023.

The central bank also is standing by its commitment to buying at least $80 billion in Treasury bonds and $40 billion in mortgage-backed securities per month, a strategy that has led more directly to today's cheap mortgage rates.

"These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses," the Fed says. Policymakers indicate they'll review "in coming meetings" how and when to taper those purchases.

The bond buying is keeping Treasury yields, or interest rates, in check. As those yields rise or fall, rates on fixed-rate home loans tend to do likewise.

With investors worried about economic risks from the Delta variant, the 10-year Treasury yield has dropped to its lowest levels since February — and mortgage rates have done the same.

Thirty-year fixed-rate mortgages are averaging just 2.80% this week, not far from January's record low of 2.65%, according to a survey from mortgage giant Freddie Mac released on Thursday.

How to take advantage of today's low rates

Young couple meeting financial advisor for home investment
goodluz / Shutterstock

Because fixed mortgage rates are dictated more by action in the bond market than by what the Fed does, they can be unpredictable and sensitive to economic news. If you’re considering a buying a home or refinancing an existing mortgage, just remember that rates could start rising on the next positive economic omen.

If you think this is the time to approach a lender — and good for you if it is — don't focus on just one. Studies have shown that comparing loan offers from at least five lenders is the key to scoring the best mortgage rate for your budget.

But you'll want to review your credit before you start your search; you can easily check your credit score for free. The lowest mortgage rates are typically offered to borrowers with the highest credit scores, so find out where yours stands and see if you need to improve it before you apply for a loan.

If you need help scraping together a down payment, you could try to make a little extra money in the stock market. A popular app allows you to invest in a diversified portfolio merely by using your "spare change" from everyday purchases.