The Federal Reserve held the federal funds rate at the current 0% to 0.25% range as it continues to deploy policy tools to underwrite an emerging recovery for the U.S. economy. And it will continue to provide such policy support until the crisis has passed and the economy has recovered.
The Fed noted that it will continue its quantitative easing policy, purchasing on a monthly basis $80 billion in Treasuries and $40 billion in mortgage-backed securities, which is helping to support low mortgage interest rates and housing demand. Home building, and housing in general, will be a leading element of the recovery, as foreshadowed by two months of gains for mortgage applications and better than expected newly-built home sales.
The Fed is projecting a 6.5% decline for GDP for 2020 (NAHB’s call is -6.2%) due to the sharp, sudden stop for the economy due to government mandated virus mitigation efforts. Like other outlooks, the nation’s central bank is forecasting a strong bounce back in 2021, with growth for that year coming in at a 5% rate.
The Fed’s projections indicate an effective zero federal funds rate through 2022, but indicated that the long-run rate should return to 2.5% (beyond 2022). The statement from the central bank indicates that the Fed will continue to be broadly accomodative in terms of monetary policy during this crisis. NAHB’s forecast includes a projection that the Fed will not advance the fed funds rate until the Fed’s target inflation rate rises to its 2% target on a consistent basis and the economy returns to full unemployment (unemployment below 5.5%). It is likely that the Fed’s miscalculation in 2018 – raising rates too quickly and causing, among other effects, a soft patch for housing in 2018/2019 – is leading the Fed to be more aggressive in the current crisis.
This monetary policy support is broadly positive for building and housing markets. The Fed’s messaging is clear: it will do what it takes to return labor markets and the economy as a whole to its prior trend. In particular, the Fed is making sure that credit is available for households and businesses to ensure the smooth operation of markets. Housing and home building are important elements for the transmission of monetary policy and will thus feature as front-line sectors during a recovery.
Despite the promising May employment report and other positive leading indicators, there is more work to do as the recovery gets underway.