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The Fed just ensured that mortgage rates will stay low

Doug Whiteman
·4 min read
The Fed just ensured that mortgage rates will stay low
The Fed just ensured that mortgage rates will stay low

Despite last week's promising news about jobs, the Federal Reserve has opted to keep its influential interest rate near zero, to help hoist the economy out of its coronavirus recession. And, it may hold rates at rock bottom for years.

The central bank decided not to raise rates at its June meeting, but it didn't lower them either, into the land of negative interest rates.

Projections released by policymakers indicate the Fed isn't likely to make any moves with rates through 2022.

That news from Fed Chairman Jerome Powell and his colleagues will be good for borrowers, including homebuyers and homeowners who've been enjoying the lowest mortgage rates on record.

The Fed's not ready to tinker with rates

Construction of children's robots. Colored boxes with paper strips, inventions and creativity for children. Trash Robots, Tinkering and making, educational activities for schools and children
Paolo De Gasperis / Shutterstock
The Fed doesn't want to tinker around.

The Fed announced on Wednesday that it would keep its benchmark interest rate — called the federal funds rate — at its current all-time low, previously seen during and after the 2008 financial crisis and the Great Recession.

That leaves the Fed's target for the federal funds rate within a range of 0% to 0.25%. The Fed chopped down the rate in mid-March as it was becoming clear that the coronavirus posed a serious threat to the economy.

"The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term," the Fed said in its statement Wednesday.

An accompanying forecast suggested the federal funds rate would stay unchanged for the next two and a half years.

This week brought the official word that the U.S. economy is in recession for the first time since 2009.

Just what the experts were anticipating

Most observers thought the Fed would hold its ground this time. Though unemployment fell surprisingly in May and employers added 2.5 million new jobs, many economists said it was too early for policymakers to declare the economy in recovery and to start raising rates.

Diane Swonk, chief economist with accounting firm Grant Thornton, says too many unanswered questions remain.

"There is no way to know when and how many businesses can safely reopen while maintaining social distancing and preserving the safety of their workers and customers," Swonk says.

Few if any experts thought the Fed would go negative with interest rates. In the simplest of terms, negative rates require savers to pay banks to hold their money, and borrowers earn interest for taking out loans.

"Negative rates have failed to prove their utility in both Japan over two decades and in Europe," says Tendayi Kapfidze, chief economist with LendingTree.

Chairman Powell has said repeatedly that the Fed has no interest in introducing negative interest rates in the U.S.

The impact for mortgage rates

Miniature wooden houses and a green arrow down. The concept of low mortgage rates.
Andrii Yalanskyi / Shutterstock
Mortgage rates are likely to stay low.

The federal funds rate directly impacts the prime rate and other borrowing costs tied to the prime, including credit card APRs and rates on adjustable-rate mortgages and home equity lines of credit, or HELOCs.

The Fed's rate doesn't have a direct effect on fixed mortgage rates, including rates on popular 30-year fixed-rate mortgages. But those rates have been barreling from one all-time low to another, thanks in part to the low-rate environment the central bank has been fostering.

Another factor pushing down mortgage rates is the Fed's program of buying up mortgage-backed securities to juice the economy. Those are mortgages bundled together into securities similar to bonds.

With the Federal Reserve choosing to maintain the status quo — likely for years — there's no reason to think rates on home loans will be rising anytime soon.

Lucky borrowers have been finding 30-year mortgage rates below 3% — even as low as 2.5%.

Deeply low rates have been prompting homeowners to refinance their mortgages; refi applications jumped 11% last week, the Mortgage Bankers Association said Wednesday.

And, today's ultra-cheap mortgage rates are pumping up home sales, which were held back by coronavirus lockdowns earlier this spring.

"Whereas in the last recession, housing was slow to recover, this time, we expect housing to be an early leader that will pull other industries up along the way," says Danielle Hale, Realtor.com's chief economist.