What to Expect at the December Fed Meeting
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At its December meeting, the Federal Open Market Committee (FOMC) will overemphasize its commitment to support the economy and financial stability, given recent weakness in economic data. The Fed might become more explicit in its forward guidance, perhaps to alleviate concerns that it would raise interest rates if inflation spikes.
Here’s an overview of what to expect from the Fed this week.
General economic support
To combat the economic contraction caused by the COVID-19 pandemic, the Fed has vastly expanded its influence on the economy. It launched and further expanded credit facilities to purchase most types of financial instruments and created special lending facilities, including ones for small businesses.
The United States is currently facing three acute challenges: The public health crisis, the derivative economic crisis and a potential financial crisis as a result. The Fed’s actions help inoculate the financial system, while the committee also supports the recovery from the economic crisis once there are impactful interventions in the public health crisis. With the first vaccines being administered this week, there’s hope that the public health crisis will be contained, but widespread vaccinations won’t happen until much later next year.
While the FOMC meets to strategize what steps to take next, the economy continues to bear the brunt of the damage as COVID-19 cases continue to rise. The Fed will seek to reassure the financial markets that it remains committed to providing support to the economy — and may even expand its commitment by increasing the size of its bond purchases and lengthening the timeline for its support.
With an incoming change in government mere weeks away, the Fed may also reiterate the need for fiscal stimulus to support the economy in the near term. So far, Congress hasn’t reached an agreement on a second stimulus package, as jobless claims continue to climb amid new business shutdowns and a surge in COVID-19 cases.
This week’s meeting will include the Fed’s projections for economic growth. The rollout of the first COVID-19 vaccine improves the medium-term outlook for the economy. However, at LendingTree, we don’t anticipate material improvement from the last forecast, which anticipated the first Fed rate hike in 2023.
Mortgage rates are unlikely to go much lower
The Fed’s impact is most directly seen in the housing market, but housing’s reliability as a leading indicator of overall economic health has diminished since the housing-induced financial crisis more than a decade ago.
The Fed drove mortgage rates lower in 2020 through its policy of asset purchases, or quantitative easing. This has supported the housing market, and mortgage rates have continued to fall since August — even as the 10-year Treasury has risen by 40 basis points (bps) in that time.
The current spread between mortgage and 10-year Treasury rates of 177 bps is now close to the pre-coronavirus pandemic average of 170. This suggests there’s less room for mortgage rates to fall further, though they’re unlikely to increase absent significant gains in the 10-year Treasury.
Consumer market seeing favorable rates, but lending standards are tight
The Fed influences a lot of other consumer rates. For example, any movement in the federal funds rate impacts credit card, personal loan, auto loan and home equity interest rates. When the Fed lowers its rate, the interest rates on these products typically fall, too. This makes borrowing cheaper and helps to stimulate the economy.
To help the economy deal with the current economic crisis, the Fed has cut its benchmark rate to zero. Though this means lower rates for many of these products, the intensity of the crisis means that loan availability is declining so the boost to the economy is muted.
Tips for borrowers to weather the storm
- Review all of your debts to see if there are opportunities to save money. For mortgages, consider refinancing to a lower rate or shorter loan term. For other products, consider switching to a lower-cost loan, such as using a personal loan to consolidate and pay off high-interest credit cards.
- Home-price gains mean many homeowners have seen an increase in equity and now have more room to borrow. Consider a home equity loan or cash-out refinance to pay off other debt. You may significantly lower your overall debt costs.
- Not all providers pass through Fed rate changes at the same time or to the same extent. The key to fully benefiting from the Fed’s actions is to compare rates from different lenders across all financial products in order to find your best deal. Doing so could save you thousands in interest costs — and better help you ride the waves of this economic storm.