US: FOMC Meeting Announcement


Wed Jun 17 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%

Highlights
The Federal Reserve is no hurry to raise rates and is waiting for job growth to pick up. But there's a little play in the wording including the description of job growth where the statement, sounding hawkish here, says slack is diminishing but at the same time, and in a dovish slant, that further improvement is needed. Definitely on the dovish side are the FOMC's economic forecasts which are less optimistic with this year's unemployment tendency moved up to 5.2 to 5.3 percent from 5.0 to 5.2 percent. Also, this year's GDP tendency is now 1.8 to 2.0 percent vs 2.3 to 2.7 percent.

Among details, the statement says growth is expanding moderately after stalling in the first quarter and that the labor market is in fact picking up. The consumer sector is described as moderate with housing improving. Business investment and exports continue to be soft. There's no change in the inflation assessment, that it's still running below target and that inflation expectations are stable. The FOMC continues to see inflation rising gradually to its 2 percent target. It says risks to the economy and labor market remain balanced.

There's no change in its federal funds rate target of zero to 0.25 percent and there's no signal on when that target will be raised, which will depend on further labor market improvement and a rise in inflation. It also repeats that the target, even when raised, is likely to remain low for the long term. There were no dissents.

Stocks rose a bit in initial reaction to the statement but are now off their highs. Rates are moving down slightly as is the dollar, both in line with a dovish assessment. Coming right up will be Janet Yellen's press conference.

Market Consensus Before Announcement
The FOMC announcement is expected to leave policy rates unchanged with fed funds still at a range of zero to 0.25 percent. But you never ever know and the hawks can put up a good argument, citing May strength in the jobs market and May strength in retail sales (not to mention upward revisions to both). This will be a discussion not about economic weakness, but economic strength.

Definition
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.

Description
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, fewer 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.

Frequency
Eight times a year.