US: FOMC Meeting Announcement

Wed Mar 18 13:00:00 CDT 2015

Consensus Actual Previous
Federal Funds Rate - Target Level 0 to 0.25% 0 to 0.25% 0 to 0.25%

Today, the Fed eliminated the word "patient" regarding when rates begin to rise. There was no change in policy rates. But the Fed changed its characterization of the economy. Growth is no longer "solid" as noted in January but "economic growth has moderated somewhat." The statement is somewhat dovish.

The Fed was a little positive about the labor market.

"A range of labor market indicators suggests that underutilization of labor resources continues to diminish."

The Fed lowered its forecasts for the unemployment rate but also for GDP growth and inflation. The Fed appears to either be willing to accept lower unemployment or acknowledge that labor force participation is declining. The lower GDP and inflation number support the Fed's dovish statement today.

The emphasis has to be data dependency. Recent indicators have softened as noted in the statement.
Yes, the unemployment rate has declined to 5.5 percent-ammunition for the hawks at the Fed.

But wages are still soft-for production workers wages are up only 1.6 percent on a year-on-year basis.
PCE inflation on a year-ago basis is up only 0.2 percent. Core PCE inflation on a year-ago basis is up only 1.3 percent.

Recent economic news has not been favorable.

The manufacturing sector continues to struggle. Industrial production for February edged up 0.1 percent after declining 0.3 percent in January. Overall industrial production was supported by a spike in utilities-other major components declined. Manufacturing dipped 0.2 percent in February after falling 0.3 percent the month before. This was the third consecutive decline for this component. Housing starts unexpectedly fell sharply in February. Starts fell a monthly 17.0 percent, following no change in January. This was the lowest starts level since January 2014 with a 0.897 million unit annualized pace. Retail sales dropped in February but gasoline prices are not to blame-rather auto sales. Retail sales in February declined 0.6 percent after decreasing 0.8 percent in January.

Overall, the Fed is not in a hurry to raise policy rates. The economy appears to need more monetary policy support than viewed in January. The next rate increase appears to now be late this year or even early next year. However, the Fed chair did not rule out a rate increase after April if data suggest.

Market Consensus Before Announcement
The FOMC announcement at 2:00 p.m. ET for the March 17-18 FOMC policy meeting is expected to leave policy rate unchanged. Also, the Fed will release its quarterly forecasts at the same time as the statement. The key issues are whether "patient" is removed from guidance and whether there are hints at when the Fed starts to raise rates.

The Federal Open Market Committee (FOMC) is the policy-making arm of the Federal Reserve. It determines short-term interest rates in the U.S. when it decides the overnight rate that banks pay each other for borrowing reserves when a bank has a shortfall in required reserves. This rate is the fed funds rate. The FOMC also determines whether the Fed should add or subtract liquidity in credit markets separately from that related to changes in the fed funds rate. The Fed announces its policy decision (typically whether to change the fed funds target rate) at the end of each FOMC meeting. This is the FOMC announcement. The announcement also includes brief comments on the FOMC's views on the economy and how many FOMC members voted for and how many voted against the policy decision. Since the last recession, the statement also includes information on Fed purchases of assets, so-called "quantitative easing", which affects longer-term interest rates. Also, a key part of the announcement is guidance on potential changes in policy rates or asset purchases.

The Fed determines interest rate policy at FOMC meetings. These occur roughly every six weeks and are the single most influential event for the markets. For weeks in advance, market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars. When bonds yield 5 percent, they will attract more money away from stocks than when they only yield 3 percent.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.
The Fed also began quantitative easing during the past recession and continues during the recovery. Fed asset purchases affect longer-term interest rates and, in turn, other financial sectors and the economy.

The Fed also began quantitative easing during the past recession and continues during the recovery. Fed asset purchases affect longer-term interest rates and, in turn, other financial sectors and the economy.

Econoday lists a separate "FOMC Meeting Begins" only for the first day of two-day policy meetings. Otherwise, "FOMC Meeting Announcement" serves the same purpose for one-day FOMC meetings since the announcement takes place just after the meeting concludes.

Eight times a year.