US: FOMC Meeting Announcement

Wed Jan 31 13:00:00 CST 2018

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

There are no surprises in the outcome of January's FOMC announcement: no change in rates underscored by a 9 to 0 vote. But the description of inflation does get an upgrade, now said to be moving up and stabilizing around 2 percent sometime "this year". The prior FOMC statement in December described inflation as below target. Household spending, following the solid holiday shopping season, also gets an upgrade, from "moderate" to "solid" which once again are the assessments for employment and business spending.

The specificity of the inflation goal is subtle but it certainly doesn't point to any fewer rate hikes this year which are currently penciled in at three. The next FOMC announcement, on March 21, will update FOMC forecasts and include the quarterly press conference and debut of Jerome Powell as the new chair.

Market Consensus Before Announcement
No rate hike is the universal expectation for the January FOMC, the last to be chaired by Janet Yellen. What to watch will be any indications whether strong economic growth and full employment are pushing policy makers toward four rate hikes this year vs the three that are already penciled in. The federal funds target is expected to hold at a midpoint of 1.375 percent inside a range of 1.25 and 1.50 percent.

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.