US: FOMC Meeting Announcement

May 3, 2017 01:00 CDT

Consensus Consensus Range Actual Previous
Federal Funds Rate - Target Level 0.875% 0.75% to 1.00% 0.75 to 1.00% 0.75 to 1.00%

Consumer spending may have slowed in the first quarter, concedes the FOMC in its May statement, but the fundamentals that underpin the consumer remain solid and point to only "transitory" weakness and a bounce back for the second quarter. As universally expected, policy makers held their federal funds target range unchanged at 0.75 to 1.00 percent at the May FOMC.

Other unexpected news since the last meeting was March's rare decline in core PCE prices (less food & gas). The statement does cite the decline, as well as other signs that inflation is soft, but still sees prices moving higher and stabilizing near the Fed's 2 percent target.

And there are upbeat notes including for the jobs market where growth is described as solid. And business investment, which jumped sharply in last week's first-quarter GDP report, gets an upgrade from "improved" to "firmed".

Otherwise, this report is virtually unchanged. There is no mention of future government stimulus, no heightening of attention on global developments, no change in reinvestment policy and no mention of unwinding the Fed's $4.5 trillion balance sheet. The vote was 10 to 0 as the majority moved to Minneapolis' Kashkari who voted against the hike at the March meeting.

Focus now turns to Friday's employment report where expected strength would point to a second-quarter rebound and help confirm expectations for a rate hike at the FOMC's next meeting in June, one of what are expected to be perhaps two or three more hikes for the balance of the year.

Market Consensus Before Announcement
In their last meeting in March, the Federal Open Market Committee raised the federal funds rate by 25 basis points to a range of 0.75 to 1.00 percent with a 0.875 percent midpoint. A further two or three such rate hikes are expected for the remainder of the year but no action is the unanimous call for May's meeting. The Fed describes the economic pace as modest to moderate despite low unemployment and early signs of labor scarcity. They consider inflation, running at a steady 1.75 percent for the core, to still be below target. Prospects of rising government stimulus have yet to affect policy as FOMC members wait for developments to take shape in Washington.

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.