Economic & Housing Weekly Note

Emergency Rate Cut Brings Federal Funds Rate Back to the Zero Bound

Key Takeaways:

Note: February data does not capture the recent escalation of the coronavirus in the U.S.

  • In response to the coronavirus outbreak’s effects on global financial conditions and communities across the U.S., the Federal Open Market Committee (FOMC) cut the federal funds rate by 100 basis points to a range of 0.00 to 0.25 percent at an emergency meeting held on March 15. The FOMC expects that “the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.” The FOMC also announced the beginning of a quantitative easing program that includes the purchases of at least $500 billion of U.S. Treasuries and $200 billion of agency mortgage-backed securities over the coming months.
  • Initial claims for unemployment insurance jumped by 70,000 to 281,000 in the week ending March 14, according to the Department of Labor. The largest single-week increase since November 2012 pushed claims to the highest level since August 2017 following Hurricane Harvey.
  • The current business conditions index for the manufacturing sector fell sharply in March, according to the New York Federal Reserve. The decline was the largest ever recorded since the series began in 2001.
  • Retail sales (including food services) fell 0.5 percent in February, according to the Census Bureau, while sales in January were revised upward by three-tenths to a 0.6 percent gain. The February decline can largely be attributed to gasoline station sales, as gas prices sunk 4.2 percent over the month. Core retail sales (excluding food services, auto, building supplies, and gas station sales) were unchanged.
  • Housing starts fell 1.5 percent in February to 1.60 million annualized units, according to the Census Bureau. While total starts fell, single-family housing starts rose 6.7 percent to 1.07 million annualized units, the highest level since June 2007. Multifamily starts declined, though remain at the third highest level in 33 years. Single-family permits increased to over 1.0 million annualized units, the highest level since May 2007.
  • Existing home sales jumped 6.5 percent in February to a seasonally adjusted annualized rate (SAAR) of 5.77 million, according to the National Association of REALTORS®, the highest level in 13 years. The increase was driven by single-family sales, which rose to the highest level since December 2006.

Forecast Impact

Given the rapidly evolving developments in the market, the impact to our most recently published forecast will be to the downside. We’re continuing to monitor developments and will provide our next full forecast update in April.

The Federal Reserve Responds to Coronavirus Risks with Another Emergency Rate Cut
Initial Jobless Claims Jump by Largest Amount Since November 2012

Details on Key Takeaways and Other Releases

  • Retail sales (including food services) fell 0.5 percent in February, according to the Census Bureau. Sales of motor vehicles and parts decreased 0.9 percent. Core retail sales (excluding food services, auto, building supplies, and gas station sales) were unchanged. Sales at furniture/appliance stores and building supply stores dropped 0.8 percent and 1.3 percent, respectively. Sales at non-store retailers increased 0.7 percent, the strongest growth since August 2019. From a year ago, retail sales rose 4.3 percent and core retail sales increased 4.0 percent.
  • The current business conditions manufacturing index fell 34.4 points in March to negative 21.5, according to the New York Federal Reserve. The forward-looking diffusion index for business conditions within the next six months fell by 21.7 points to 1.2, the lowest level since February 2009. Any reading below zero represents contraction.
  • Existing home sales jumped 6.5 percent in February to a SAAR of 5.77 million, according to the National Association of REALTORS®. Single-family sales rose 7.3 percent to a SAAR of 5.17 million, while condo/co-op sales were unchanged from the downwardly revised January number of 600,000. Sales rose in every region except for the Northeast. Supply remained tight as the months’ supply was unchanged at 3.1 months and for-sale inventories fell on a year-over-year basis by 9.8 percent, the ninth consecutive month of declines. The median sales price, which is not adjusted for the mix of sales, rose 8.0 percent year over year, the fastest pace of growth in four years.
  • Housing starts fell 1.5 percent in February to 1.60 million annualized units, according to the Census Bureau. Single-family starts rose 6.7 percent to 1.07 million annualized units, while multifamily starts fell 14.9 percent to 527,000 annualized units. Single-family permits increased 1.7 percent to 1.0 million annualized units, while multifamily permits fell 18.3 percent to 460,000 annualized units.

Economic and Strategic Research Group
March 20, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.