US: FOMC Meeting Announcement

Wed Sep 20 13:00:00 CDT 2017

Consensus Consensus Range Actual Previous
Federal Funds Rate - Target Level 1.125% 1.00% to 1.25% 1.00 to 1.25% 1.00 to 1.25%

As expected, the FOMC announced the unwinding of its $4.5 trillion balance sheet beginning in October. There is no change in the funds rate which stays at a range of 1.00 to 1.25 percent. For unwinding, the committee is holding to its June statement and will allocate rollover amounts across maturities based on the proportions it holds. Unwinding, which will take several years to unfold, will begin gradually at a $6 billion cap (limit) for Treasuries and $4 billion for mortgage-backed securities. The caps will increase in 3-month intervals by $6 billion for Treasuries and $4 billion for mortgage-backed securities until they reach $30 billion per month for the former and $20 billion for the latter.

The economic assessment is also steady with job growth said to be continuing and economic activity described as moderate. Temporary hurricane effects are cited and include a rise for gasoline prices though the inflation outlook remains unchanged, running somewhat below their 2 percent goal.

Quarterly FOMC forecasts continue to see one more rate hike this year with median projections unchanged for 2017 and 2018 at three 25 basis point hikes penciled in each year, to 1.4 and 2.1 percent respectively. There is a change to 2019 which is trimmed back to a median 2.7 percent from 2.9 percent with the long run call cut back 2 tenths to 2.8 percent. Median projections for 2017 GDP growth are up 2 tenths to 2.4 percent with GDP seen slowing to 2.1 percent next year followed by 2.0 in 2019 percent and 1.8 percent in 2020. The unemployment rate is seen unchanged from June forecasts at 4.3 percent this year with 2018 and 2019 each cut 1 tenth to 4.1 percent. Core PCE inflation is cut 2 tenths this year to 1.5 percent and 1 tenth next year to 1.9 percent. The core is seen at 2.0 percent in both 2019 and 2020.

There are dovish elements in the results including the downgrades for future inflation, but the initial response to the statement is hawkish given unchanged projections for rate hikes in the remainder of this year and for next year. Demand for Treasuries is falling in response to the announcement with the 2-yield up 6 basis points to 1.44 percent. The dollar is moving higher. The vote was unanimous at 9 to 0.

Market Consensus Before Announcement
No rate hike is expected at this month's Federal Open Market Committee meeting but the beginning of balance-sheet unwinding is a distinct possibility. Debate at the meeting will center on the path of inflation, which has been soft but did show life at the core level in August, and possible economic risks due to Hurricanes Harvey and Irma. Caution over either issue could delay balance-sheet unwinding to another meeting. Whatever the decision, wording and updates on unwinding will be closely watched. For rates, all forecasters see the FOMC holding the federal funds target at a 1.00 to 1.25 percent range with a 1.125 percent midpoint.

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 extended its bond purchases to late 2014. In late 2015, the Fed began to raise its federal funds target.

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.