Zillow Market Pulse: August 28, 2020

August 28, 2020

The Federal Reserve adjusted its inflation targeting policy, a move that will likely benefit employment in the next economic expansion. Consumer spending decelerated in July. And Fannie and Freddie extended programs offering relief to homeowners.

New Fed policy places more emphasis on unemployment

• The Federal Reserve announced that they would now target an "average" of 2% inflation, rather than a fixed goal, suggesting they could overshoot for a period of time
• The change means that, going forward, clear inflationary pressures will be required before increasing rates

Growth in consumer spending slowed in July

• Personal consumption expenditures rose a seasonally adjusted 1.9% in July from June
• Spending levels are down 4.6% from pre-pandemic levels

Fannie and Freddie extend homeowner relief programs through the end of the year

• Fannie Mae and Freddie Mac announced Thursday that moratoria on foreclosures and evictions of homes associated with mortgages they service would be extended through December 31
• The programs were due to expire on August 31

So what? 

The Federal Reserve's major shift in their policy-setting framework and overall mandate was largely expected and will likely not have any significant impacts on monetary policy in the short or even medium term. It does, however, set the stage for a more cautious path for setting rates during the coming economic expansion, a decision that should have a noticeable impact on employment. The Fed's previous policy stance suggested that they raise overnight interest rates – thereby "slowing down" the economy – as the unemployment rate fell below a so-called "natural" level in order to prevent a presumed increase in prices. By targeting inflation that averages 2%, allowing them to overshoot for a period of time, job growth will be able to continue for longer, something that will disproportionately help disadvantaged populations who haven't been able to reap the benefits of past economic expansions. Recently, there have been calls for the Fed to explicitly target racial disparities in employment and wealth as part of their mandate – this change in policy stops short of that, but will implicitly address those issues. 

U.S. consumers increased their spending for the third straight month in July but the rate of growth slowed considerably. The 1.9% monthly increase in consumer spending followed a 6.2% increase in June, a notable slowdown, particularly in a month when nearly two million jobs were added. The deceleration adds more evidence that uncertainty surrounding the virus spread and expiration of some fiscal benefits is weighing on consumers' outlooks. Indeed, high-frequency data show that the slowdown in spending has continued through August, and the personal savings rate remains very elevated relative to historic norms. Overall spending is down 4.6% from February's pre-pandemic levels. Consumer spending is responsible for about two-thirds of U.S. economic output, so how people respond to these enduring uncertainties in the coming months will be crucial in dictating the next chapter of the economy's recovery.

Acknowledging the uncertain path forward for the economy, Fannie Mae and Freddie Mac announced that programs helping suffering homeowners would be extended through the end of the year. On Thursday, the two government sponsored enterprises (GSEs) announced that their moratorium on foreclosures and evictions, which was due to expire on August 31, would remain active through December. What's more, the GSEs announced that they will continue to provide up to 12 months of forbearance to borrowers who have been financially impacted by the economic fallout due to the coronavirus. Combined, the announcement was surely welcome news for households and landlords who were stressing about the looming expiration date. Just under 1.5 million loans serviced by Fannie and Freddie remain in forbearance, a level that has fallen gradually from a high point in the spring and could increase in the fall as the impact of higher levels of persistent unemployment starts to take shape. It's important to note that the GSEs (as well as the FHA, which has also extended their moratorium to December 31) service about two-thirds of the single-family home loans in the U.S.

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