Fed Stimulus Continuation Helps Bonds and Mortgage Rate Drops
On Monday, June 8, 2020, the stock market seemed to be getting its legs back and moving upward again. The anticipation of businesses opening again had investors pushing valuations upward finally after weeks of floundering. However, on Friday, June 12, the market was pummeled back to the floor as government reports released were not taken kindly. The one respite was the Federal Reserve confirming they were going to keep interest rates low and the stimulus program going for the foreseeable future, a plus sign for both mortgage financing as well as investment bonds.
Moving Monetary Policy Proactively
Similar to the previous Recession in 2009, the Fed has been busy taking over Treasuries to the tune of $2 billion in buy backs. The government has also been shoring up the mortgage industry with similar purchasing of related securities. The mid-week announcement that this stimulus strategy was not ending anytime soon (at least through 2022) was seen as exactly what the finance industry needed, and mortgage rates went down even lower.
These Are Not the Droids You're Looking For
Part of the comfort level by the Feds with increase monetary flow from the government has to do with inflation. Normally, the government would be leery of too much dollar supply, driving up inflation and reducing buying power. However, because the economy retrenched and income levels are lower overall, the monetary relaxing now is offsetting what would otherwise be a shortage of money supply in the market. Inflation is going down due to the economic fallback, so continuing the low cost of money makes it easier for spending to occur again.
Nothing Stays the Same
Good things don’t last forever, though. Every quarter forward is expected to be evaluated by the Feds, which also means the central bank types reserve the right to change their mind earlier than the latest announcements if something dramatically changes before 2022. However, no one is arguing that consumer spending needs to increase to get things back on their feet again. And one of the biggest areas of spending tends to be housing sales.
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