US: FOMC Meeting Announcement

Wed Jun 13 13:00:00 CDT 2018

Consensus Consensus Range Actual Previous
Federal Funds Rate - Target Level 1.875% 1.75% to 2.00% 1.75 to 2.00% 1.50 to 1.75%

Two rate hikes are in the books in 2018 and there may be, not one, but two more to go before the year is out. Citing a labor market that continues to strengthen and a pick up in household spending, the FOMC is raising its overnight target rate by 25 basis points to an expected range of 1.75 to 2.00 percent. What's not completely expected, is that the FOMC forecasts are penciling in an extra rate hike this year as the median funds forecast is now 2.4 percent vs 2.1 percent in the March forecasts.

In a hawkish note, the statement doesn't say, as it has in the past, that the funds rate will remain low for some time. The strength of the jobs market is especially important here, reflected in the forecasts which now have the unemployment rate ending the year at 3.6 percent, not 3.8 percent as in March.

On prices, though policy makers expect inflation to run near its symmetric target of 2 percent, forecasts for both the PCE and core PCE have been moved higher, up 2 tenths from March for the PCE to 2.1 percent and up 1 tenth for the core to 2.0 percent. The statement makes no mention of trade policy though this issue is certain to come up at the Jerome Powell's press conference which follows shortly. The statement repeats that policy remains accommodative with risks roughly balanced.

Given the strength of recent economic data, it's no surprise that today's results are on the hawkish side in what may not be a plus for the stock market. In a technical move to keep funds on target, the Fed is also raising interest on overnight excess reserves by 20 basis points to 1.95 percent. Vote for today's action was unanimous 8 to 0.

Market Consensus Before Announcement
An incremental 25-basis-point rate hike is the unanimous consensus of Econoday's sample for the June FOMC, to a mid-point 1.875 percent within a 1.75 to 2.00 percent range. The strength of employment will likely be cited as the central factor for the rate hike, offsetting still moderate rates of inflation and what may be a no better than modest assessment of consumer spending. Quarterly FOMC forecasts will be updated and Jerome Powell will give his second quarterly press conference.

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.