Fed Cuts Rate by Half a Percentage Point

Reacting to growing economic concerns stemming from the coronavirus, the Federal Reserve Federal Open Market Committee (FOMC) today reduced the target range for the federal funds rate by 50 basis points, lowering the target to 1% to 1.25%.

This is the first time since 2008 the FOMC enacted a federal funds rate cut outside of the typical meeting schedule. It was adopted unanimously and just two weeks before their scheduled March meeting. The target rate is now the lowest since late 2017, completely unwinding the rate hikes of 2018.

In a statement, the Fed said: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”

The Fed’s action was expected, but perhaps not to this degree and timing. And the policy change was consistent with recent declines for interest rates in the bond market. These declines should push mortgage interest rates closer to a low 3% average for the 30-year fixed rate mortgage.

However, the virus poses supply-side and potential growing demand-side challenges that are not precisely addressed by monetary policy. Fundamentally, this economic situation is one that must be addressed through public health and scientific institutions. The rate cut is supportive, both as a signal and as an insurance move for possible economic softening.

NAHB Chief Economist Robert Dietz provides further analysis in this Eye on Housing blog post.

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