Fed to Keep Rates Near Zero
July 30, 2020
The Federal Reserve voted Wednesday to keep its benchmark interest rate near zero. This will keep the cost of loans down until the economy starts to recover from the COVID-19 pandemic. The Fed also announced Wednesday it would be extending its lending and credit initiatives until the end of the year to help make it easier for Americans to get a loan.
The Fed’s key benchmark rate is not directly tied to mortgage rates, but it often indirectly influences them.
The federal funds rate is what banks charge one another for short-term borrowing. That does not reflect the exact rate that consumers pay.
Interest rates are currently low, but “the challenge is that lending standards have gotten much stricter,” Tendayi Kapfidze, chief economist at LendingTree, told CNBC. “Banks are tightening standards pretty aggressively because they are concerned that the damage to the economy is going to be long lasting.”
Greg McBride, Bankrate’s chief financial analyst, says consumers with a credit score of 700 or above are likely to get the best rates. For lower credit scores, “the availability of credit starts to dry up,” he says.
The Federal Reserve is closely monitoring the economic impact of the pandemic.
“The coronavirus outbreak is causing tremendous human and economic hardship,” the Fed said in a statement. “The path of the economy will depend significantly on the course of the virus.”
The U.S. recovery is “extraordinarily uncertain,” Fed Chairman Jerome Powell said in a video press conference on Wednesday. The Fed is “not even thinking about raising rates,” Powell said. “We’re stepping in to provide credit at a time when the market has stopped functioning.”
The Fed has vowed to use “its full range of tools to support the economy in this challenging time.”
In mid-March, the Fed started buying Treasuries and mortgage-backed securities. MBS yields track Treasuries, so both types of purchases are putting downward pressure on mortgage rates, HousingWire reports. Mortgage rates have reached all-time lows in recent weeks. The 30-year fixed-rate mortgage dipped below a 3% average in mid-July.
The Fed reportedly may also adjust its purchases of Treasury bonds and mortgage-backed securities that could nudge already low long-term rates even lower.
The central bank expects to keep its federal funds rate near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” its statement read.
“Fed Keeps Rates Near Zero—It’s Good to Borrow at Low Interest Rates, Experts Say. Here’s What Else it Means for Your Wallet,” CNBC (July 29, 2020); “Fate of the Economy Depends on Virus Control, Fed Says,” HousingWire (July 29, 2020); and “With Coronavirus Surging, Fed Keeps Key Interest Rate Near Zero, Vows More Support,” USA Today (July 29, 2020)
Updated: May 11, 2021