The Fed Fund Recap



I know that you’ve all been waiting for the Fed Fund recap, so first, I just wanted to say thank you for being so patient. Every single day that my team and I wake up to get ready to go to work, we’re crunching numbers and getting ready to coordinate with underwriters, realtors, and lenders—all while keeping up with current market conditions—so that you can close on your home loan and move in as fast as humanly possible.


Since we’re currently in a seller’s market (on top of being in one of the most competitive housing markets in the country), it’s important for my team and I to stay ahead of the curve by watching what the Fed does very carefully.


If you’re unfamiliar with the Federal Reserve, it’s the central bank of the United States. It has twelve branches located in twelve major metropolitan areas within the US and has four functions:

  • Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

  • Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.

  • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

  • Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.

So in a nutshell, the Fed runs this circus, and we’re all just a bunch of trapeze artists waiting for our next cue.


Unemployment Drops to 5.9%


The labor market averaged about 540,000 new jobs per month so far this year. This made unemployment drop from 6.7% to 5.9%. In the first quarter of 2021, wages jumped to a 4% annual increase.


The wage increase was due to employers trying to find people to refill positions as the economy started to pick back up. There was also a huge reduction in job searches, which happened partly because employees still participating in the labor force were being spread thin at their companies.


During the pandemic, several companies started restructuring the responsibilities of their current employees by shifting their responsibilities to cover other departments. Those employed also had longer work weeks to fill in the gaps at companies that were under-staffed.


Job Openings Jump by 30% Compared to 2019


The pandemic also made businesses take a step back and reevaluate their current business models. Many started investing in new technologies to help them manage their profitability with fewer employees.


Older employees also seemed to reevaluate their circumstances, and the pandemic accelerated retirement rates, leaving behind a younger workforce.


Let’s keep in mind though, that even though many are retiring and companies are investing in new technologies to fill in labor shortages—job openings jumped 30% above the avg. level for 2019. Right now, the ratio of job openings to job seekers has gone up by 1.2%.


Not to mention that in June of this year, the labor force participation rate was 61.6%. In February 2020, it was 63.4%; so while there’s been a small dip, we’ve made huge strides.

The labor force participation rate would’ve probably been higher if:

  • The US had higher vaccination rates

  • People hadn’t had to leave work to become caregivers

  • There hadn’t been a surge in retirements

  • There hadn’t been as many job losses

  • People didn’t have as many health concerns

  • The pool of potential hires hadn’t been reduced (due to all of the factors above)

Even so, there was a huge 4% annual increase in wages at the start of the first quarter, and a general 2.8% wage increase when looking back at June 2020. Something I thought was interesting was that wages actually rose by 8% in the business sector, with wage gains in the leisure and hospitality business following close behind.


Inflation


According to the PCE price index (Personal Consumer Expenditure Price Index), which reflects changes in the prices of goods and services purchased by consumers in the US; in December 2020, inflation was 1.2%. In May 2021, inflation increased to 3.9%. While this is above the Fed’s long term goal of 2%, it’s only a temporary increase. I repeat: temporary!

So, let’s talk about it. What exactly is causing inflation?


To keep it short and sweet:

  • There’s been a rebound in prices

  • There are still imbalances between demand and supply

  • We’re currently dealing with hiring and supply difficulties


Let’s all take a step back for a second. Americans are a trigger-happy bunch. We love shopping. About 200 million of us are Amazon Prime members—and yes, that includes me. That’s 60% of the country buying things online at midnight, ordering speedy, two-day shipping. So I think I speak for most of us when I say that we like things done; and we want them done yesterday.


But here’s the thing, when the global pandemic hit, corporations across the world decreased (and in some cases stopped) production. That means that now, companies are still reeling and trying to catch up to supply our increasing demands.


It’s supply bottlenecks, and not the state of our economy that are driving inflation up temporarily. That’s why your grocery bill will be a little higher for the next couple of months. All it is, is us working out the kinks in our economy after a very stressful, uncertain year.


GDP


In other news, GDP is up by 6.5% in the first quarter, and it’s set to make gains in the 2nd quarter. This is due to increased household spending, fiscal support, and the reopening of the economy.


Now that we’ve made it past our toilet paper hoarding phase and everyone’s loosened up a little, spending is starting to come back to normal levels. Spending has been very high, specifically when it comes to durable goods like cars and appliances. The only thing that’s held back sales has been low inventory due to global supply chain disruptions.


The GDP’s been supported by rising income, consumer confidence and low interest rates. Debt delinquency rates are also low. While it’s predicted that debt delinquency may rise for some homeowners unable to make it out of forbearance, this rate should be tiny; given how the FHFA is helping homeowners exit forbearance.


Housing


When it comes to housing, we’ve got more of the same: high home values due to low inventory. Even so, residential investments have surged and demand has remained high as mortgage rates have stayed low.


However, the rise in investment was led by investments made in equipment and intangibles such as software and technology, whose demand has increased due to remote work and short-staffing.


For the most part, business investments have recovered, with a turnaround in oil prices spurring investments in gas and oil.


Meanwhile, we’ve seen a drop in bank lending towards small businesses. PPP loans will be terminated as of July 30th, 2021. The Fed Fund recap states that the Federal Reserve will also be winding down the portfolio for the Secondary Market Corporate Credit Facility, and the emergency lending facility will close on December 31, 2021.


The Fed’s Monetary Policy


The Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 0 to ¼ percent. The Committee will keep the range for federal funds rate at 0 to ¼ percent until labor market conditions have reached satisfactory levels of what they consider to be appropriate levels of maximum employment. That, and until inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.


The Committee has also increased the holdings of Treasury securities and agency mortgage-backed securities in the System Open Market Account. The Federal Reserve has continued to expand its holdings of Treasury securities by $80 billion per month and its holdings of agency mortgage-backed securities (MBS) by $40 billion per month. By backing these investments and buying up mortgages across the nation, the Fed keeps interest rates low for home buyers.


But more importantly, it keeps the housing market stable. These asset purchases help keep the bond market running smoothly, so you can have your pick of low mortgage rates!

In fact, all of the principal payments that the Fed receives from the mortgages it’s bought, it uses to buy more mortgages so that we can continue having a strong housing market across the board.


Even though PCE inflation was 3.9% in May, it's projected to go down by the Fed's calculations. Don't believe me? Then take a look at the graph below.


Where We’re Headed


So there you have it, the US economy is running like clockwork—it’s just waiting on supply chains to catch up to its sunny disposition.


And listen, I know you might still have some reservations. Most of the clients I speak to still have fears about dealing with another housing bubble. They’re scared of walking straight into another Great Recession—but I’m here to tell you that that’s simply not going to happen.


We’re wiser, bigger, and better than we were in 2008. All of the lessons we learned from that time have been put into practice; and believe you me, I don’t want any of us to have to go through something like 2008 ever again.


I do think it’s incredible though, how these big events can shape our economy, starting a chain reaction that’s later reflected in your mortgage interest rate.


I Can’t Contain My Excitement *Ba Dum Tss*


While I was reading the Fed Fund recap, I saw that we’re currently experiencing a container shortage. While we have a high rate of imports, we have a low rate of exports (because we don’t have enough shipping containers—it’s wild!). It’s actually changed the way that we order items.


Remember how I was talking about how people were buying more durable goods like cars, stoves, fridges, etc? Well that’s partly due to the container shortage. People can’t afford to waste time importing low quality, high volume items because the big fish need frying. Not to mention that shipping delays are happening left and right—so if you’re gonna order something—it better be worth the wait.


Bottom Line? Rates Are Low, Optimism is High.


We’ve also had HUGE log jams at our nation’s ports. Since COVID-19 has made ports cut down on the number of staff present for safety precautions, it’s been taking way longer for goods to get in and out of the country. Where once ships were going in and out, now at least ten ships are waiting outside of ports so that they can make their deliveries, which has temporarily affected the flow of goods.


And remember that crazy snow storm that swept through Texas? Well, according to the Fed Fund recap, it damaged several petrochemical plants along the Gulf Coast—and they were only able to resume their regular production in May. What I’m trying to say is that there’s a lot of moving pieces in an economy, so it’s important to know how everything is connected to see where things are headed. An event in one part of the country can cause a ripple effect everywhere else.


As with anything that’s as large as a national economy, nothing is set in stone—but I’d like to point out that the positives far outweigh the negatives.


So, final diagnosis: inflation is a little higher than usual as we hit the ground running, but Armageddon won’t be happening anytime soon. So kick back, relax, go to work—hell, order that TV you’ve been wanting. It might be a couple dollars more expensive and have some shipping delays, but I guarantee it’ll make it to your doorstep.