Fed sets the tone keeping rates at 0%

The Federal Reserve doubled-down on its new inflation policy this week with the announcement that rates likely won't go above 0.25% until at least 2023. All but four individual members of the Federal Open Market Committee projected rates would stay in the 0%-0.25% range until that time, with Fed Chair Jerome Powell noting, “rates will remain highly accommodative until the economy is far along in this recovery.”

Essentially, while the economy is starting to show signs of recovery, it is still moving at a glacial pace. In a post-meeting statement, the FOMC added "it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time." The FOMC believes it will take us until at least 2023 to return to the 2% inflation goal. 

It's important to keep in mind that the overnight lending rate set by the Fed is not the same as your mortgage rate. While it indirectly affects your mortgage rate, the Fed keeping rates at 0% does not mean your mortgage rate is 0%. Mostly the Fed's rate will affect consumers when it comes to things like credit card interest rates. 

The FOMC's announcement didn't initially shake the markets, but investors seemed to become cautious about the hope for a sharp rebound from the pandemic. Thursday's markets saw another tech sell-off with Facebook, Amazon and Apple leading the way. The Nasdaq slipped close to 2% and dipped back into correction territory while the Dow snapped a four-day winning streak. Futures were mixed Friday morning but generally trending upward. The 10-year Treasury note yield was little changed but trading lower Friday morning at 0.671%. 

Markets did get some positive news on Thursday as unemployment numbers were better than expected. The Labor Department shows about 860,000 people filing initial unemployment claims. What's better is the number of continuing claims went down by 900,000 to 12.63 million. Continuing claims are ones made for at least two straight weeks.  

Housing hits a snag

A lack of skilled labor and a drastic increase in the cost of building materials has builders wary about the near future of homebuilding. We've been tracking the increase in lumber costs as they've skyrocketed 170% since April. According to the National Association of Homebuilders, the increase in the cost of supplies translates to an additional $160,000 to build each new home.  So while single-family housing starts increased by 4.1% in August, the question is whether or not those homes can be finished in a timely and cost-effective manner. 

This week Freddie Mac noted an increase of 19% in first-time homebuyer activity for August. That's to be expected as many first-time homebuyers have increased purchasing power due to historically low interest rates. The 30-year fixed-rate average for Freddie Mac stood pat this week at 2.87%. 

Overall, mortgage application has slowed, according to the Mortgage Bankers Association weekly survey. However, that doesn't mean it's not healthy. The MBA's chief economist Joel Kan notes, “Purchase activity has outpaced year-ago levels for 17 consecutive weeks, with a stronger growth in loans with higher balances pushing MBA's average loan size to a new survey high of $370,200." Refinance activity is also still 30% higher than 2019 levels at this same time.

Of note: 

• The FOMC updated its GDP projection for 2020 to a full-year decline of 3.7% instead of 6.5%.
• Economic data released by Yelp shows that more than 97,000 have closed permanently since the beginning of the pandemic. That's equal to roughly 60% of businesses within the company's database. 
• OPEC and OPEC+ cut its forecast for oil growth in 2020 and the first half of 2021.
• Since the beginning of 2020, oil prices have dropped by 35%.