Due to the spreading economic damage caused by mitigation efforts to slow the spread of the coronavirus, the Federal Reserve provided an immediate round of monetary policy stimulus. The policy announcement included:
- A cut in the federal funds rate to a top rate of 0.25%
- The discount rate was effectively lowered from 1.25% to 0.25% as a means of ensuring liquidity for depository institutions
- A new round of quantitative easing was enacted to include purchases of $200 billion of mortgage-backed securities (MBS) and $500 billion of Treasuries
- The Fed also cut the reserve requirement for a large number of banks to zero to ensure liquidity
These and other policy changes were needed given the growing economic stress caused by uncertainty and the shutdown of major elements of the economy, particularly in the service sector. These impacts threaten economic growth and labor market conditions.
For housing markets, the purchase of $200 billion of mortgage-backed securities was particularly important given the rise in mortgage interest rates last week that signaled a drop in investor ability or desire to purchase MBS. This action will help stabilize mortgage rates over the coming week, although more purchases of MBS will likely be required.
The economy came into this period of economic stress in solid shape. However, conditions have changed dramatically in recent weeks. The Fed noted:
Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee (FOMC) met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress.
In announcing the new round of quantitative easing, the Fed’s FOMC stated:
The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.
The Fed noted in forward guidance that it is prepared to do more as necessary:
The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
This was a necessary move by the nation’s central bank, and one that is supportive of housing markets. It is good that the Fed did not wait until Wednesday and acted before major markets opened on Monday.
More support will be needed however, as forecasts – including NAHB’s – expect economic growth to be markedly negative for the second quarter. The degree of growth in the third quarter and for 2020 as a whole will depend on whether current virus mitigation efforts are successful in flattening the curve for infection.
The Fed cannot do this alone. Additional policy support will be needed in the areas of regulatory policy and fiscal stimulus to ensure small businesses and households are able to endure during this period of mitigation.
NAHB is continuously monitoring this situation and will continue to engage with policymakers as we collect more information on the status of the housing and building industry.