The Fed Makes a Bold Move

The Fed Makes a Bold Move

Yesterday’s unprecedented action taken by the Federal Reserve was intended to both calm the markets and help support our economy as we deal with the economic effects of the Coronavirus.  In premarket trading, the stock market fell hard enough to trigger a temporary shutdown, which is not what the Fed was hoping for.  The problem is that a rate cut and more Quantitative Easing doesn’t help the small restaurant owner who’s business is forced to close, or the airline pilot who is no longer needed due to a lack of travel demand.  Things are getting very scary quickly for many large and small businesses.

 

In addition to cutting the Fed Funds rate, the Federal Reserve also reenacted the Quantitative Easing strategy that successfully helped grow the stock market following the Great Recession.  This is where the Fed essentially prints money and uses the money to make purchases of 10-Year Treasury Notes and mortgage backed securities.  This drives interest rates lower and helps drive more investment out of the bond market and into the stock market.  Although this will greatly help after the virus fears have subsided and the market is on a path of recover, it will do little to slow the drop in stocks in sectors like airlines which could be facing massive bankruptcies soon.  I believe we have a while to go before we see a bottom in the stock market.

 

The mortgage bond market has so far responded positively to yesterday’s news.  At the moment, bond prices are at the same levels they were at when rates bottomed out a week ago.  The concern will be capacity.  The mortgage industry is not able to keep up with the level of consumer demand for new loans.  As a result, rates are driven higher by investors who have limited money do invest.  My suggestion is to apply immediately and be prepared to lock in a rate.  Consider a longer lock to help get you through this mortgage crunch.

 

Remember what happened last week.  Rates could move quickly.  Consider locking if rates again come close to all-time low levels.