On a Sunday night call with journalists in mid-March, four days after the World Health Organization had labelled COVID-19 an “alarming” global pandemic, Federal Reserve Chairman Jerome Powell laid out his plans to rescue the U.S. economy.
Anxiety in the U.S. was high – in the previous three days, the National Basketball Association and other major sports organizations had called off games, U.S. states had begun shutting down and movie star Tom Hanks had announced that he and his wife, Rita Wilson, had tested positive for the novel coronavirus.
As always, Powell, 67, spoke softly and calmly on the audio-only March 15 call, using the bland language that leaders of the world’s most powerful central bank are known for. One wrong phrase could cause markets to react around the world, as they had more than two decades earlier when former Fed Chairman Alan Greenspan’s choice of two words, “irrational exuberance,” caused a global tailspin.
Powell started by expressing concern for the victims of the coronavirus and for the harm caused by the economic shutdowns, describing the “stay at home” orders being issued by state governors as “essential for containing the outbreak.”
He also announced more than half a dozen new measures the Fed would employ to buffer the economic blow of the shutdowns, including the Fed’s biggest foray into the bond market in over a decade.
The bond-buying would take the form of $500 billion in Treasury bills and $200 billion of mortgage-backed securities, Powell said on that March 15 call.
Both would support the mortgage market because the investors who decide what yield they’re willing to take for MBS – and thus what interest rate borrowers pay for home loans – benchmark their decisions off the yield for long-term Treasuries, especially the 10-year bill. Yields shrink when competition for bonds goes up.
“We’re going to go in strong starting tomorrow, and we’re going to buy across the curve, and we’re going to buy MBS, and we’re really going to use our tools to do what we need to do here, which is restore these important markets to normal function,” Powell said, aiming to avoid a repeat of the 2008 credit crunch that crashed the financial system.
It helped. The next day, a Monday, the Fed went out and bought $7.6 billion of MBS, and the daily average rate for a 30-year fixed mortgage tumbled by 23 basis points – almost a quarter of a percentage point.
The following day, a Tuesday, the Fed purchased $3.6 billion. On Wednesday, it bought $6.2 billion.
But, it wasn’t enough. The COVID-19 death toll had risen by almost 10 times in the prior week and the economic data became bleaker, with jobless claims soaring to a then-record.
By that Thursday, the average mortgage rate had spiked to a two-month high as nervous lenders began adding what’s known as a “risk premium.”
Normally, the average rate for a 30-year fixed mortgage is about 1.5% to 1.6% above the yield on the 10-year Treasury, but by March 19 the margin was the widest it had been since the financial crisis more than a decade ago.
So, Powell tried again. In an announcement posted on the Fed’s website at 8 a.m. on Monday morning, March 23, before the opening of U.S. stock markets, he said the central bank would make “unlimited” purchases of MBS and expand several of its other programs.
That’s when the magic happened. The average mortgage rate for a 30-year fixed loan had its biggest one-day shift, according to data provided to HousingWire by Optimal Blue that goes back three years.
The Fed’s pledge of unlimited support shaved 32 basis points off the average rate that day, pushing it down to 3.45%.
It was the announcement itself that made borrowing cheaper, not the purchase that followed later that day, showing how much value bond investors put on the Fed’s word.
The market specialists at the Federal Reserve Bank of New York in lower Manhattan, who execute purchases for the central bank, bought $30.2 billion of MBS that day, a smaller investment than the $35.8 billion in the prior trading day, a Friday.
Mortgage-bond investors were, as usual, making their pricing decisions on expectations.
There were much bigger investments coming in the second half of the week, but the rate didn’t move on those days as much as on the day of the “unlimited” announcement.
In a three-day buying spree starting on March 25, the Fed bought $99.9 billion of MBS, with a peak on the 26th, when it purchased $41.9 billion. Those purchases pushed down the average daily mortgage rate a total of 8 basis points over the three days, according to Optimal Blue data.
In all, Fed purchases of MBS between March 16 and April 13 totalled $458.1 billion, according to data provided to HousingWire by the central bank. The purchases will continue as long as they are needed to support the mortgage market, Powell said.
The daily average rate on Friday fell to a seven-week low of 3.356%, according to Optimal Blue.
That’s the lowest since March 9, before COVID-19 began shutting down the U.S. economy and investors started panicking.
Powell’s pledge of unconditional love for the mortgage market is working so far. From the predictions he made on the March 15 call with reporters, he probably isn’t surprised by that.
“As these purchases roll forward, you will see the Treasury market and the MBS market returning to normal market function, and that will actually support economic activity,” Powell told reporters.
A reporter from the Financial Times pressed him on that call about what to call the MBS buying. Could it accurately be called a resurrection of the quantitative easing program former Fed Chairman Ben Bernanke used during the mortgage and housing markets meltdown more than a decade ago?
“I’m pretty sure that every person on this call has an editor asking to determine whether or not this is quantitative easing,” the reporter said.
Powell responded, in short: Call it what you want, as long as it works.
“What I can tell you definitively is the purpose of the asset purchases,” Powell said. “It really is to support the availability of credit in the economy—households and businesses—and thereby support the overall economy,” he said.
“In terms of what it’s labelled, that’s of less interest to me,” Powell said.