US: FOMC Meeting Announcement

Wed Jul 29 13:00:00 CDT 2015

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

The Fed took no rate action at the July FOMC meeting and saw no change in the pace of economic growth which it continues to describe as "moderate". There's a small upgrade for the labor market where gains are now described as "solid" and the unemployment rate as "declining". There's also a small upgrade for housing where "additional improvement" is being cited. But household spending continues to be described as moderate with business investment and net exports still described as "soft". Otherwise there's no major changes in the statement and no mention of the negative effects of the strong dollar.

The Fed, before lifting up rates, is waiting for further improvement in the labor market and for inflation to begin moving toward its 2 percent policy target. Whether lift off is September or December is still up in the air though the upgrade for the employment description sounds a bit hawkish. There's also a special hawkish subtlety with the Fed now saying that "some" further improvement is needed in the labor market vs just further improvement in the June statement. This could imply that the bar for job improvement has been lowered slightly.

Initial market reaction showed a momentary pop higher for the Dow which, at 17,709, is now a bit lower from before the announcement. Demand for Treasuries is on the rise suggesting that some, despite the word changes surrounding jobs, see the statement as dovish. There were no dissents in today's vote.

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, 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.

Eight times a year.