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Fed Cites Progress Waiting For Stronger Jobs Numbers Before Tapering

Despite hints at progress, homebuyers should expect little change in mortgage interest rates following July's Federal Reserve meeting.

July 29, 2021
July 29, 2021
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Homebuyers can expect little change in mortgage interest rates based on the latest Federal Reserve meeting.

The Federal Open Market Committee announced it will keep interest rates near zero and maintain its level of mortgage backed securities (MBS) buying until “substantial further progress” has been made toward their goals of maximum employment and price stability.

That’s important, because the Fed is the biggest purchaser of MBS. When it finally announces tapering off, investors will anticipate lower demand for these bonds and mortgage rates will rise.

Chair Jerome Powell’s opening statement following the meeting contained subtle changes from last month’s that hinted at progress toward these goals. However, he made it clear in the press conference there is still ground to cover on the labor market side.

What is substantial further progress?

The Federal Reserve has cited substantial further progress on employment and price stability as a reason to maintain loose monetary policy since December 2020.

In terms of price stability, the Fed has a long-term goal of maintaining 2 percent inflation. Currently, inflation is running well above that level and the committee pointed out that supply chain bottlenecks and hiring difficulties raise the possibility that inflation “could turn out to be higher and more persistent than we expect.”

If that is the case, the Fed said it will use its tools to move it back toward 2 percent.

Powell also said the economy is still “some way away” from substantial further progress on maximum employment.

“I can’t give you a set of numbers, for example a numerical threshold we used back in 2012,” Powell said. “I would want to see some strong job numbers. And that’s kind of the idea.”

Despite this shortcoming, Powell was optimistic about the employment outlook based on the abundance of job openings available to those looking. In fact, Powell suggested the number of openings may be slowing the hiring process as workers shop around for the right fit.

“This is now not so much about people going back to their old job, it’s about finding a new job,” he said. “That’s a time intensive and labor intensive process, and there may be a bit of a speed limit on that.”

He also cited surveys showing that people are reluctant to return to jobs where they are exposed to COVID-19, a lack of caretaker positions with schools unopened, and lingering unemployment benefits.

What does this mean for mortgage rates?

For homebuyers looking to capitalize on low interest rates, no change is good change. And aside from some subtle hints at progress, this meeting produced no changes that will affect interest rates in the short term.

However, Powell did admit that inflation may run higher and longer than initially expected, which is likely to continue impacting home prices. Homebuyers waiting for prices to drop may end up treading water for a while, all while missing out on low interest rates, home equity, and appreciation.

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