Summary

Central banks around the world use monetary policy tools to promote economic growth and stability; for example, in the United States, the Federal Reserve (Fed) uses federal funds rate adjustments, quantitative easing (QE) or tightening, forward guidance, and other tools “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Changes in monetary policy affect both businesses and consumers. For consumers, changes in monetary policy affect bank credit supply, refinancing activity, and home purchases, which in turn affect household consumption and thus economic growth and price stability. The U.S. Fed rate cuts and QE programs during COVID-19 led to historically low interest rates, which spurred a huge wave of refinancings. However, the pass-through of rate savings in the mortgage market declined during the pandemic. The weaker pass-through can be linked to the extraordinary growth of shadow bank mortgage lenders during the COVID-19 pandemic: Shadow bank mortgage lenders charged mortgage borrowers higher rates and fees; therefore, a higher market share of them means a smaller overall pass-through of rate savings to mortgage borrowers. It is important to note that these shadow banks did provide convenience to consumers, and they originated loans faster than banks. The convenience and speed could be valuable to borrowers and important in transmitting monetary policy in a timelier way, especially during a crisis.