The Fed Has a New Approach to Inflation: What It Means for Your Mortgage Rate


The Federal Reserve is shaking things up — which is both good and bad news for consumers.

The Fed made some of the biggest changes to its policy in years following an extended review. The central bank has revised its approach to inflation and the labor market in a move that could usher in an extended period of low interest rates.

But the new approach won’t mean that consumers will save money across the board. “The Federal Reserve’s new strategy could divide the landscape for the various financial products important to consumers,” said Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University.

Here’s how the Fed’s new policy will affect Americans’ finances:

What did the Fed change?

The Fed is now officially less concerned about high inflation. Moving forward, central bankers will target inflation that averages 2% over time. This means that following a stretch with low inflation, the Fed might allow inflation to run above 2% for a period of time.

Along these lines, the Fed will concern itself less with the strength of the labor market. “A tight labor market is no longer correlated to inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analyticom.

In the past, the Fed’s official view was that a strong labor market could cause inflation to jump — as a result, the central bank would move to raise rates even if higher levels of inflation had yet to materialize when the job market was especially strong.

The new policy will allow the Fed to keep rates low even if the job market rebounds and inflation picks up. As a result, some have suggested that it may be many, many years before the central bank hikes rates again.

Americans will save on credit-card interest because of the Fed’s new policy

The good news for any Americans with credit cards is that the annual percentage rate on your cards should go down — or remain low — for the foreseeable future.

“Card APRs are still high, but they’re actually the lowest they’ve been in years, largely thanks to the Fed,” said Matt Schulz, chief credit analyst at LendingTree. “Their latest announcement means that rates are likely to stay at low levels for some time.”

The same is true for other forms of shorter-term debt, including home equity lines of credit and some personal loans. On short-term loans like these, the bulk of the movement in interest rates is tied to changes in the federal funds rate, which is the interest rate commercial banks used to borrow or lend reserves to each other.

The federal funds rate is the benchmark for these forms of debt. Earlier this year the Fed cut the federal funds rate twice, prompting a drop in interest rates on many forms of consumer debt.

“The Fed isn’t the only factor that affects credit card interest rates, but in recent years, it has definitely been the biggest one,” Schulz said. “The truth is that for most of the last decade, credit card APRs haven’t moved all that much, except for when the Fed raised or lowered rates.”

In the case of credit cards, a lower rate doesn’t necessarily mean an affordable one though. The average credit card APR currently stands at 16.03%, well above the rates seen for other loan products like mortgages or auto loans. That is down from 17.68% a year ago, said CreditCards.com industry analyst Ted Rossman, but it only amounts to $8 a month in savings for someone making minimum payments toward the average credit card debt (which is $5,700 according to the Fed.)

“This is why credit card debtors shouldn’t expect the Fed to ride to their rescue,” Rossman said. “It’s really important to pay down credit card debt as soon as possible, since rates are so high.”

Your savings account may not generate as much income in the future

The interest earned via high-yield savings accounts and certificates of deposit is dependent on the Fed’s interest rate policy. As such, these savings vehicles won’t generate major amounts of interest income so long as the Fed maintains its low rate stance amid low inflation.

If inflation picks up though, banks could move the interest on these accounts higher though, Geller said.

Mortgage rates could actually rise even if the Fed keeps rates low

“Long-term interest rates will be much less affected by this policy change,” Reaser said. And that includes mortgage rates.

Mortgage rates don’t respond directly to moves on the Fed’s part because the Fed only controls short-term interest rates. Instead, the rates on mortgages ebb and flow in response to movements in the long-term bond market, particularly the yield on the 10-year Treasury note. Therefore, mortgage rates are more subject to the whims of bond investors.

“If investors fear that the Federal Reserve might be too late in responding to any buildup in inflation pressures, long-term rates could be higher,” Reaser said. This logic doesn’t just apply to 30- and 15-year mortgages though, but also to longer-term personal loans and student loans.

The Fed can take certain actions that would keep mortgage rates down though.

“The Fed being more accommodative might mean that they are purchasing more mortgage-backed securities and treasuries which could counter the inflationary effect on the longer rates for things like mortgages,” said Tendayi Kapfidze, chief economist at LendingTree.



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Renters in U.S. Cannot Be Evicted Through the End of the Year Due to Coronavirus, CDC Order States


The Centers for Disease Control and Prevention implemented a temporary eviction moratorium through the end of the year, protecting U.S. renters from losing their homes during the COVID-19 pandemic, the Trump administration announced Tuesday.

The CDC’s moratorium will apply to all rental units nationwide until Dec. 31 and goes into effect immediately, senior administration officials said of an unpublished CDC agency order. Treasury Secretary Steven Mnuchin told a U.S. House of Representatives panel Tuesday that the moratorium would cover around 40 million renters.

A previous federal eviction moratorium created by the CARES Act ended in late July and only applied to federally-funded housing, including rental units with mortgages backed by Fannie Mae and Freddie Mac. The moratorium will apply to any state in which there is not already a more protective ban in effect, according to the order. Multiple states have eviction moratoriums in place, including California, which established new rules in a late-night vote Monday.

Renters will be eligible for the moratorium’s protection if they received an economic impact payment, or stimulus check, as provided for by the CARES Act. Therefore, single renters must earn no more than $99,000 a year, while couples filing jointly can earn up to $198,000 annually.

The order, which was shared ahead of being published in the Federal Register on Sept. 4, includes a declaration for renters to sign and give their landlord. Senior Trump administration officials said the form would be made available on the CDC’s website.

Renters must indicate on the declaration that they cannot afford to pay their rent in full and that if evicted they would become homeless or force to move into congregate housing. Renters also must be able to prove that they made an effort to receive government assistance and that they could not afford rent.

The moratorium does not absolve renters of paying the rent. That money is still due to landlords, and senior administration officials said that renters should still attempt to make partial payments when they cannot afford to pay in full.

Landlords will still be permitted to evict tenants in certain cases, such as instances in which the tenant has destroyed property or poses a threat to the health or safety of neighbors.

The moratorium builds on a previous executive order from President Donald Trump that directed the Department of Health and Human Services and the CDC to determine whether halting evictions was necessary to contain the spread of the virus that causes COVID-19.

“In the context of a pandemic, eviction moratoria — like quarantine, isolation, and social distancing — can be an effective public health measure utilized to prevent the spread of communicable disease,” the CDC’s unpublished order said.

“President Trump is committed to helping hardworking Americans stay in their homes and combating the spread of the coronavirus,” White House deputy press secretary Brian Morgenstern said during a briefing Tuesday.

Housing advocates said the move was “long overdue,” but called for more help to be provided to renters facing financial difficulties amid historically high levels of unemployment caused by the pandemic.

“As we have said for five months, the very least the federal government ought to do is assure each of us that we won’t lose our homes in the middle of a global pandemic: The administration’s action would do so and will provide relief from the growing threat of eviction for millions of anxious families,” said Diane Yentel, president and CEO of the National Low Income Housing Coalition.

“But while an eviction moratorium is an essential step, it is a half-measure that extends a financial cliff for renters to fall off of when the moratorium expires and back rent is owed,” Yentel added, while calling on Congress to pass another COVID-19 relief bill with at least $100 billion in emergency rental assistance. Previously, some lawmakers and activists called for a cancellation of rent during the pandemic.

Trump administration officials during Tuesday’s briefing said that renters and landlords would have access to emergency funds already in place, including billions of dollars in grants from the Department of Housing and Urban Development and the $142 billion coronavirus relief fund from the Treasury Department.

Administration officials could not clarify whether the CDC moratorium would prevent eviction filings from occurring. Housing and legal advocates have raised concerns that landlords filed evictions against many people nationwide who should have been protected by the CARES Act moratorium.



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New U.S. Home Sales Surge in June to Strongest Rate in 13 Years


The numbers: Sales of new single-family homes rose sharply for the second straight month in June, pushing the sales rate to its highest level in 13 years, according to data released Friday.

The annual sales pace for U.S. new-home sales rose 13.8% last month to 776,000, the Commerce Department said Friday. That’s above the prior cycle high of 774,000 hit in January and is the strongest since July 2007, according to the Mortgage Bankers Association.

Economists polled by MarketWatch had expected a June sales rate of 710,000, compared with an original May estimate of 676,000. On Friday, the government revised May’s rate to 682,000. That pushed the May rise in new home sales to 19.4%

What happened: Sales rose in all four regions, with the largest gain of 89.7% coming in the Northeast. June’s sales pace is 6.9% above a year earlier.

The median price of new homes was $329,200 in June. That is 5.6% above the price one year ago. There were 307,000 new homes estimated to be up for sale, which equates to a tight 4.7-month supply. A 6-month supply of homes is generally considered to be indicative of a balanced market.

Big picture: Only last month, one economist said it might take two years for new home sales to rise above January’s level. Housing is leading the recovery fueled by low mortgage interest rates. Some analysts also see an boost from workers deciding to move to the suburbs now that they can work from home. Mortgage applications for home purchases hit 11-year highs earlier this month. Still, the spread of the coronavirus in July adds some downside risk to the sector.

What are they saying? “The impact of falling mortgage rates – down 80 basis points this year – is more than offsetting the wave of Covid-induced job losses, which seem to be hitting younger renters rather than would-be homebuyers; the median buyer is 47 years of age, while the median restaurant employee is 29,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Market reaction: Stocks opened lower Friday on renewed tension between the Trump administration and China. The Dow Jones Industrial Average was down about 60 points in early trading, off earlier lows.



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