The Federal Reserve this week voted to keep its benchmark interest rate at close to zero. The move should help ensure the cost of home loans remains down, long enough for the economy to begin its recovery from the COVID-19 pandemic, experts said.
The Fed also said it’s extending its credit and lending initiatives until the end of 2020 to make it easier for people to obtain a loan.
The Fed’s key benchmark rate is not directly tied to mortgage rates, but it often indirectly influences them.
Tendayi Kapfidze, chief economist at LendingTree, told CNBC that while interest rates remain low, “the challenge is that lending standards have gotten much stricter. Banks are tightening standards pretty aggressively because they are concerned that the damage to the economy is going to be long lasting.”
As such, consumers with a credit score of above 700 are likely to secure the best rates, said Greg McBride, chief financial analyst at Bankrate. For those with lower ratings, “the availability of credit starts to dry up,” he said.
The Federal Reserve said it’s 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.”
Fed Chairman Jerome Powell said in a video press conference on Wednesday that any prospect of recovery is “extraordinarily uncertain” and that the Fed is “not even thinking about raising rates”.
“We’re stepping in to provide credit at a time when the market has stopped functioning,” he added.
The Fed also said it will use its full range of tools in support of the economy.
Back in March, it began buying Treasuries and mortgage-backed securities. MBS yields track the Treasuries, so both purchases are putting downward pressure on mortgage rates, HousingWire reported. Rates are currently at all-time lows, with the 30-year fixed-rate mortgage now below a 3% average.
The Fed may also step up its purchases of Treasury bonds and MBSs to push long-term rates even lower, analysts have speculated.
The central bank wants to keep the federal funds rate near zero until it is confident that the economy has weathered the storm and that it gets back on track to achieve the government’s stated employment and price stability goals, it said.
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