| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 0bp |
| Federal Funds Rate - Target Range | 5.25 to 5.50% | 5.25 to 5.50% | 5.25 to 5.50% |
Highlights
The FOMC statement for the April 30-May1 meeting was largely unchanged from the one issued on March 20 with three alterations for which to take note.
First, the FOMC added language that said,"In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective". This acknowledges that inflation indicators are not providing the sort of confidence that FOMC participants are looking for before removing any monetary policy restriction form the current 5.25-5.50 percent fed funds target rate range.
Second, the FOMC now says that the risks for achieving the dual mandate maximum employment and price stability are in better balance. However, the statement did not ease back on the FOMC's vigilance. The statement said,"The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks."
Third, and most importantly but with no significant policy effect, the FOMC announced it is lowering the cap on reinvestments of US treasuries from $60 billion to $25 billion in June and leaving the cap on reinvestments in agency debt and agency mortgage-backed securities at $35 billion. While a reduction in the cap for US treasuries reinvestments was anticipated, the size was more than expected. It appears that the FOMC feels that a quick reduction in the cap will accomplish their goals of managing the balance sheet better and that markets have been sufficiently well prepared for the change which is scheduled to begin in June.
Overall, the FOMC statement maintains its hawkish stance for interest rate policy while slowing the reductions in the size of the balance sheet to a pace that allows the Fed to smoothly transition over time from an abundant reserves environment to one that is considered ample.
First, the FOMC added language that said,"In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective". This acknowledges that inflation indicators are not providing the sort of confidence that FOMC participants are looking for before removing any monetary policy restriction form the current 5.25-5.50 percent fed funds target rate range.
Second, the FOMC now says that the risks for achieving the dual mandate maximum employment and price stability are in better balance. However, the statement did not ease back on the FOMC's vigilance. The statement said,"The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks."
Third, and most importantly but with no significant policy effect, the FOMC announced it is lowering the cap on reinvestments of US treasuries from $60 billion to $25 billion in June and leaving the cap on reinvestments in agency debt and agency mortgage-backed securities at $35 billion. While a reduction in the cap for US treasuries reinvestments was anticipated, the size was more than expected. It appears that the FOMC feels that a quick reduction in the cap will accomplish their goals of managing the balance sheet better and that markets have been sufficiently well prepared for the change which is scheduled to begin in June.
Overall, the FOMC statement maintains its hawkish stance for interest rate policy while slowing the reductions in the size of the balance sheet to a pace that allows the Fed to smoothly transition over time from an abundant reserves environment to one that is considered ample.
Market Consensus Before Announcement
Outside of a possible adjustment to balance sheet unwinding, Wednesday's Federal Reserve announcement and press conference look to be routine, that is no policy headlines, no new guidance on rates, only repetition that more progress on inflation is needed before cuts can begin.
Definition
The FOMC meeting announcement is a policy statement issued at the conclusion of each meeting of the Federal Open Market Committee. It offers updates on economic conditions with special focus on the health of the labor market and the latest on inflation. It also updates the status of the federal funds target which is the FOMC's official policy interest rate. This rate is expressed within a range, such as 1.75 to 2.00 percent. The center of this range is the implied target. The higher this target, the more restrictive monetary policy becomes, the lower this target, the more accommodative policy becomes. Other policy tools are also discussed in the meeting announcement including updates on direct purchases of Treasuries and mortgage-backed securities. Debate is not offered in the statement, just the consensus view is expressed, though the statement does list the total committee vote and how each member voted.
Description
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, through direct purchases in the market, steadily increased its holdings of Treasuries and mortgage-back securities before pulling back from the program beginning in late 2017. Along with lowering its bond holdings, the Fed began to gradually raise its federal funds target until mid-2019 when, facing slowing global growth, it began to lower its target.
Frequency
Eight times a year.
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, through direct purchases in the market, steadily increased its holdings of Treasuries and mortgage-back securities before pulling back from the program beginning in late 2017. Along with lowering its bond holdings, the Fed began to gradually raise its federal funds target until mid-2019 when, facing slowing global growth, it began to lower its target.
Frequency
Eight times a year.
