Thank you, Jerome Powell

Federal Reserve Chairman Jerome Powell did something commendable on Sunday. He and his capable board reduced the federal funds rate to zero to pump liquidity into the economy, thus assuring enough oxygen gets into the sick economy.

Once again, Powell and his board proved they can act decisively and in a timely fashion when they see a clear need to do so to continue fulfilling their dual mandate of low inflation and high employment. 

Mortgage loan borrowers are no doubt especially thankful. Most are homeowners, and the Fed’s new fund rate of zero means lower interest rates on mortgage loans, from about 4 percent on existing loans to as low as 2 percent — a saving of one half the monthly mortgage interest payments. The resulting savings on interest payments could be spent by consumers to buy more goods and services and thus work like a fiscal stimulus and revive the economy. This makes the Federal Reserve Board not only the monetary policymaker, but also the economic policymaker.

For example, a homeowner with a $100,000 mortgage at 4 percent presently pays $4,000 in interest annually. A homeowner with the same mortgage at 2 percent will pay $2,000 in interest annually. The $2,000 difference can now be spent by the consumer and increase total demand.

If the mortgage is $300,000, the homeowner now pays $12,000. At a 2 percent mortgage rate, his new annual interest payment will be $6,000. In this case the savings of $6,000 can now be pumped into the economy.       

The average American pays $5,646 in mortgage interest annually. The new Fed rate makes it possible to cut this payment by half, or by $2,823, giving the other half, or $2823, to consumers to spend as they please. Multiplied by 327 million Americans, this amounts to $923 billion. 

Put differently, the $923 billion has the effect of fiscal policy, which so far President Trump has been unable to achieve. It’s one more reason to thank Powell for using monetary policy to achieve fiscal goals.        

In addition, Americans could benefit from lower annual interest payments on auto loans (about $800,) credit cards (about $855) and students loans (about $641), although the size of the saving is not easy to calculate.

To take advantage of this unusual situation, homeowners must shop for the lowest mortgage rates and other closing costs, then refinance their present mortgages. Rates have not dropped yet, because it takes time for this drastic interest rate reduction to percolate into the mortgage industry. But one thing is certain — rates will drop in the coming weeks or months.

Homeowners who refinance can spend the difference between their old and higher payments and the new, lower payments. But my advice is to take a 10-year mortgage at a 2 percent rate or less. Even then, the homeowner would have the same or lower monthly payment and get done in ten years. 

Remember that a 2 percent mortgage rate is really a 0 percent mortgage rate, since inflation is running at about 2 percent.

Unlike the 2008 Great Recession that forced many homeowners to foreclose because they were unable to make their mortgage payments, the present economic turmoil is beneficial to all those with a mortgage. This is an unintended consequence of the Fed’s need to pump liquidity into the economy by making money – that is, loans – cheaper. 

Even the terrible coronavirus has a silver lining. 

Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor emeritus at the Anderson School of Management at the University of New Mexico, and his book about stagflation, “Marketing in a Slow-growth Economy,” was published by Praeger Publishing.