US: FOMC Meeting Announcement

Wed May 02 13:00:00 CDT 2018

Consensus Consensus Range Actual Previous
Federal Funds Rate - Target Level 1.625% 1.50% to 1.75% 1.50 to 1.75% 1.50 to 1.75%

The Fed is working a little bit of elbow room for itself when it comes to inflation which is suddenly very near target. The FOMC kept its policy rate unchanged as expected at a range of 1.50 to 1.75 percent but, regarding its 2 percent inflation target, the words "symmetric objective" are being emphasized and moved into the main text, adding a note of overshoot risk. Wording in both the March and January statements said inflation was expected to move up and stabilize around 2 percent with no hint of a risk that it might move beyond target.

Job growth in today's statement is once again described as strong but growth in overall activity as moderate. And in a hint of weakness, consumer spending is once again, as it was in the March statement, said to be moderating. One positive change is business investment which, following its first-quarter strength, has been upgraded back to strong.

Monday's core PCE price index shot up 3 tenths to 1.9 percent which is not only knocking at the 2 percent door but is already at the high end of the FOMC's forecast range for this year. Signs of inflation appear to be taking the notice of FOMC members who can't afford to get behind the inflation curve and risk an unscheduled acceleration in rate hikes. Market expectations are certain to fix on a rate hike at the June meeting. Vote for today's decision was once again 8 to 0.

Market Consensus Before Announcement
No change in rates is the unanimous consensus of Econoday's sample for the May FOMC, to hold at a mid-point 1.625 percent within a 1.50 to 1.75 percent range. First-quarter weakness will likely be understated in the statement as an anomaly with key emphasis to center on the outlook for growth and whether inflation pressures are picking up.

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.