As more segments of the economy shut down over the weekend in an effort to slow the spread of coronavirus, the Federal Reserve unleashed a round of monetary policy stimulus, including the purchase of $200 billion in mortgage-backed securities and $500 billion of Treasuries.
Among the other moves was a cut in the federal funds rate to a top rate of 0.25%, reducing the discount rate from 1.25% to 0.25%, and boosting liquidity by slashing the reserved requirement for banks.
For housing markets, the purchase of $200 billion of mortgage-backed securities was particularly important given the rise in mortgage interest rates last week that signaled a drop in investor ability or desire to purchase MBS. This action will help stabilize mortgage rates over the coming week, although more purchases of MBS will likely be required.
This was a necessary move by the nation’s central bank, and one that is supportive of housing markets. It is good that the Fed did not wait until Wednesday and acted before major markets opened on Monday, said the National Association of Home Builders’ (NAHB) in its Eye On Housing blog.
More support will be needed however, as forecasts – including the NAHB’s – expect economic growth to be markedly negative for the second quarter. The degree of growth in the third quarter and for 2020 as a whole will depend on whether current virus mitigation efforts are successful in flattening the curve for infection.
The Fed cannot do this alone. Additional policy support will be needed in the areas of regulatory policy and fiscal stimulus to ensure small businesses and households are able to endure during this period of mitigation.