US: FOMC Meeting Announcement


Wed Dec 16 13:00:00 CST 2015

Actual Previous
Federal Funds Rate - Target Level 0.25 to 0.50% 0 to 0.25%

Highlights
As expected, liftoff and the beginning of the planned withdrawal of stimulus has begun. The Fed has lifted its fed funds target to a range of 0.25 to 0.50 percent, meeting expectations for a 1/4 point rate hike from its long-held recovery range of zero to 0.25 percent. The vote was unanimous, 10-0.

The Fed sees only gradual rate increases ahead and expects the funds rate to remain accommodative, that is below long-term levels for some time. The statement cites "considerable" improvement underway in the labor market and says it is "reasonably confident" that, in the medium term, inflation will move to its 2 percent target as the effects of prior declines in energy and import prices fade. Turning to the FOMC forecasts, the Fed still expects the median funds rate to end 2016 at 1.4 percent though 2017 is moved down to 2.4 percent from 2.6 percent. The Dow initially moved lower but then quickly moved higher in initial reaction to the statement.

In other moves, the discount rate has also been lifted by 1/4 point, to 1.00 percent from 0.75 percent. The Fed is also hiking interest on excess reserves to 50 basis points from 25 basis points. The reverse repo rate is set at 25 basis points from 5 basis points. There is no change in the reinvestment of Treasuries and mortgage-backed securities.

Today's results are likely to qualify as a dovish rate hike. Changes in policy all met expectations and the description of the economic outlook remains moderate with the statement specifically citing softness in exports as a negative factor. Next up will be Janet Yellen's press conference.

Market Consensus Before Announcement
The first rate hike of the recovery is expected for the FOMC meeting announcement at 2:00 p.m. ET, lifting the fed funds rate to 0.375 percent from a range of zero to 0.25 percent. The assessments of the labor market and of inflation will be closely watched, with the former having improved but the latter remaining soft. FOMC forecasts will also be posted along with the announcement, shortly followed by the Fed Chair press conference.

FOMC Consensus Forecast for Dec. 15 Policy Vote on Fed Funds Target: to 0.375 percent from a range of zero to 0.25 percent

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.