US: FOMC Meeting Announcement

Wed Dec 13 13:00:00 CST 2017

Consensus Consensus Range Actual Previous
Federal Funds Rate - Target Level 1.375% 1.250% to 1.500% 1.25 to 1.50% 1.00 to 1.25%

It was a 7 to 2 vote but the FOMC, as expected, has indeed lifted its federal funds target by 25 basis points, to a 1.25 to 1.50 percent range. The committee expects the labor market to "remain strong" and the economy to continue to rise. Growth in household spending is once again described as "moderate" and most still expect inflation to move higher and stabilize around 2 percent. Members continue to describe policy as accommodative and repeat that near-term risks are balanced. The two doves who voted against the hike come from the regional Feds: Evans of Chicago and Kashkari of Minneapolis. Their dissent underscores skepticism that high levels of employment will lead to wage-push inflation.

There was no upward movement in the quarterly funds forecasts for next year with three more 25 basis point moves still penciled in to 2.1 percent, though here the bias may be to the downside as six members see funds below this rate by the end of next year vs four who see it above the rate. The outlook for 2019 also calls for three similar hikes with two hikes now the call for 2020, up from one previously.

There was no mention of tax policy in the statement though GDP forecasts are up with 2018 now at a median 2.5 percent from 2.1 percent though the long run median holds at a very modest 1.8 percent. The unemployment forecast, where change is the most evident, is now forecast to fall to 3.9 percent next year from the prior call for 4.1 percent.

Market Consensus Before Announcement
The economy is at full employment and the Federal Open Market Committee appears guaranteed to raise its federal funds target for a third time as planned this year. Econoday's panelists all see the target rising 25 basis points to a range of 1.25 to 1.50 percent. Quarterly FOMC forecasts will be of special interest and whether they reflect any early expectations for tax cut stimulus.

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.