Powell: “Ground to cover” before tapering asset purchases

Short-term interest rates will remain near zero

The Federal Reserve today said that while the economy has “made progress” toward employment and price stability goals, it will not yet change its stance toward asset purchases, which has propped up the mortgage market.

Short-term interest rates will remain near zero, and the central bank said in a statement that it expects to keep that target until its labor market goals are met and inflation rises to 2% and is on track to moderately exceed 2% for some time.

In a Wednesday afternoon press conference, Federal Reserve Chairman Jerome Powell said there is still “ground to cover” in the labor market before the central bank tapers the $80 billion in bonds and $40 billion in mortgage backed securities purchases. It has been making the purchases since March of 2020.

Powell also said the central bank expects inflation, which has driven up lumber, used car and hotel prices, to be “transitory.” That means the Fed does not expect price increases to increase unabated on a permanent basis, Powell explained.

Freddie Mac attributed the persistently low mortgage rates in part to growing concerns over the Delta variant. The Centers for Disease Control has said the Delta variant is much more aggressive and transmissible than the initial strain of COVID-19, and is now 83% of COVID-19 cases.

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Powell, however, said that while a surge in Covid cases will have “significant health consequences,” each successive wave has had a diminished economic impact.

“What we’ve seen is with successive waves of Covid over the past year, there is less in the way of economic implications with each wave,” Powell said. “We will see if that is the case with the Delta variety.”

Mike Fratantoni, chief economist at the Mortgage Bankers Association, said that Powell’s remarks hinted that there is “potential for announcing a tapering plan is in the cards over the next few meetings.”

Meanwhile, mortgage rates are still at historically low levels, which is driving refinance activity, Fratantoni said.

The trade association said that it expects a taper of asset purchases, and somewhat higher mortgage rates, in the second half of the year.

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