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More Monetary and Fiscal Stimulus

Once again, the corona virus dominated financial market news this week. Both the Fed and the government are taking unprecedented actions to support the economy. Daily volatility remained extremely high, but the net change in mortgage rates for the week was relatively small.

On Monday, the Fed announced that it will purchase bonds “in the amounts needed” to support the economy and the smooth operation of financial markets. In short, this means that there is no limit to the size of the Fed’s purchasing power. Since agency mortgage-backed securities (MBS) are on the list of types of bonds that it will buy, this was positive news for mortgage rates.

As of Friday morning, the Senate had passed a massive $2 trillion fiscal stimulus relief package and a vote in the House is expected soon. This will provide some much needed relief to individuals and businesses, especially in the hardest hit areas. The supply of Treasuries issued by the government will increase to fund the spending, though, so this was negative for mortgage rates, roughly offsetting the news from the Fed.

The latest report showed that core inflation has been holding steady below the Fed’s target rate of 2.0%, and slowing economic activity due to the epidemic is expected to cause further declines. In February, the core PCE price index, which excludes the volatile food and energy components, was just 1.8% higher than a year ago.

Looking ahead, the corona virus will remain the main focus. Investors will be watching for news about additional Fed actions or government fiscal stimulus programs. The major economic data is expected to reflect the negative impact of the epidemic to a greater degree. The monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.

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