The Economic Updates From This Week’s Fed Meeting Mean Good Things for Homebuyers

The Federal Open Markets Committee, or FOMC — which is the part of the Federal Reserve that manages the policies and policymaking regarding the nation’s money supply — met for a two-day stint this week to lay out the latest economic projections, and the result of this meeting could mean big things for homebuyers.

This week’s meeting was important in part because it yielded the first economic projections we’ve gotten from the FOMC since December 2019. The Fed normally would have provided economic projections during the March 2020 meeting, but it was canceled out of an abundance of caution due to Covid-19.

You’re probably thinking why does this matter? Well, the outcomes from these FOMC meetings have a drastic impact on our economy, so it’s important to keep an eye on this information and weigh how it will affect you and your wallet. Let’s take a look at the key takeaways from this week’s FOMC meeting and how they can affect you if you’re trying to buy a home.

The important takeaways from this week’s FOMC meetings

Before we jump into the takeaways, it’s important to fully understand what the FOMC does. The FOMC meets eight times a year to discuss the outlook for the U.S. economy and what the monetary policy options should be in response to the outlook. These meetings dictate whether policies change, short-term interest rates are hiked or lowered, and/or review economic and financial developments, among a ton of other things.

The committee was designed to promote stable prices and economic growth via policymaking, and unsurprisingly, setting federal interest rates are a major part of that equation. If federal interest rates are raised, it was a decision made by the FOMC. If they’re lowered, it was the FOMC.

So, what happened that’s worth noting during this week’s meeting?

There was no interest rate hike or drop

During this meeting, the FOMC unanimously opted to keep the federal funds rate at what it has been the last few months: between 0% to 0.25%, which is extremely low. Per the FOMC’s statement on the decision, it opted to keep interest rates low due to the “ongoing public health crisis, [which] will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

In short, the decision not to raise interest rates was made because of the hit the economy took from the COVID-19 pandemic. The majority of the nation’s economists weren’t expecting any interest rate changes to come from this meeting, but it’s an important takeaway nonetheless because it means interest rates on banking and loan products will likely stay low for a while — perhaps even into 2022, according to some economists.

The FOMC is projecting an expected upturn in the economy

While the interest rate decision wasn’t surprising, what was surprising was the economic forecast by the FOMC. The key economic predictions from the meeting were:

  1. An expected decline in the real gross domestic product (or GDP) of 6.5% in 2020, which will be followed by a sharp recovery — including a projected 5% GDP growth in 2021 and a projected 3.5% GDP growth in 2022
    • What does this mean? The gross domestic product measures how healthy of a country’s economy is, and a decline in the national GDP basically means that the national economy is experiencing (or will experience) tough times. A decline in the GDP is usually marked by a number of factors, including a decline in wage growth, high unemployment numbers and other factors you’d expect to see during a recession.
    • So, what we’re seeing above is that the health of the nation’s economy will continue to be on the decline through 2020, but will start to become healthy by 2021 and 2022. It’s good news for 2021 and 2022, and not so good news for the rest of 2020.
  2. An expected decline in unemployment numbers from the current rate of 13.3% to 9.3% by the end of 2020
    • What does this mean? A decline in unemployment numbers may seem troubling, but in this case, a decline is actually a positive. It means that the percentage of people who are out of work in America will shrink to 9.3% from 13.3% by the end of 2020 — more people will be working, though 9.3% unemployment means the number of people who are jobless is still pretty high.
  3. Unemployment numbers are expected to further improve by the end of 2021, with an expected 6.5% unemployment rate
    • What does this mean? What this means is that even more people (about 3% or so) will be off of employment and back to work in 2021 when compared to 2020. It’s a good thing — more work means more money flowing through the economy and a healthier future.
  4. The Fed expects unemployment rates to be at 5.5% by the end of 2022
    • What does this mean? This means that by 2022, our unemployment rates should be much closer to normal. More people will be back to work, more jobs will be available and the economy will be back on track.
  5. Low projected inflation rates — the Fed expects an 0.8% inflation in 2020, a 1.6% inflation rate in 2021, and a 1.7% inflation rate in 2022, which is well below what the Fed’s target 2% inflation rate is.
    • What does this mean? This concept is slightly more complicated, but what it basically means in this context is that the inflation rate, while it will rise next year and the following year, is going to stay low during 2020 — which signals a weak economy for the rest of the year. The greatly increased inflation numbers for 2021 and 2022 mean the economy will probably improve vastly from what it currently is, but it still won’t hit the target of 2% that the Feds have set.

So, in short, this means that the national economy will likely improve, but perhaps not very much during 2020. The Fed expects a steep, V-shaped recovery on the GDP, a future drop in unemployment rates through 2022, and doesn’t expect inflation rates to increase much over the next two years. The Fed interest rate stayed close to 0%, though, which means interest rates will probably stay low through 2022.

I’m trying to buy a home. What does this mean for me?

Well, it means a few things. It means the economy will likely recover, those Depression-era unemployment rates are going to stick around for a while, but they probably won’t stay dismal forever — and it also means that if you’ve been contemplating buying a home, now could be the right time to do so.

Why, you ask? Well, when the Fed decided not to raise interest rates it caused mortgage-backed bonds to improve significantly, and in turn, mortgage rates dropped quickly. The 30-year fixed-rate mortgage average was 3.21% for the week ending June 11, Freddie Mac reported Thursday. The average lender is now able to offer conventional 30-year fixed loans with rates between 2.875% to 3.125%

Other mortgage loan rates dropped, too, including rates for both 15- and 30-year FHA loans and rates for 5-, 15- and 30-year VA loans. The rates on 5-year ARM FHA loans increased slightly, but only by about 0.01%.  

So, basically any type of mortgage loan you’ve been considering will now have a lower interest rate — with a few exceptions, of course. If you’ve been on the fence about taking out a mortgage, these low rates could be the tipping point. You’ll want to move quickly, though, since the Fed rate only impacts mortgage loan interest rates — it doesn’t dictate them.

Over the last few months, there has been a trend of increasing rates based on supply and demand: when rates are low, lenders have too much business, so they raise rates to decrease demands. This could easily happen in this situation, too — rates dropped by -0.13% on average this week, which means that demand will once again be up.

So, if you want to get the best rate on your mortgage, you better move quickly. Rates could be up again soon based on increased demand. Just be sure to shop around, ask questions and make sure you choose the right lender for your needs.

Angelica Leicht

Mortgage Researcher

Angelica Leicht is a writer and editor who specializes in everything mortgage-related for Interest.com. Her work has spanned topics that include lending product reviews, interest rate trends, racial biases in mortgage lending and the role of fintech in lending practices, and has appeared in publications such as Interest, The Simple Dollar, Bankrate, The Spruce, Houston Press and VeryWell, among others.