FOMC Forecasts Revised Up, 4 Rate Hikes Expected In 2018

by Ike Obudulu Last updated on February 24th, 2018,

The Federal Open Market Committee, (FOMC), of the Federal Reserve Board on Wednesday released the minutes of the Committee meeting held on January 30-31, 2018.

The minutes for each regularly scheduled meeting of the committee ordinarily are made available three weeks after the day of the policy decision and subsequently are published in the Board’s Annual Report. The descriptions of economic and financial conditions contained in these minutes are based solely on the information that was available to the Committee at the time of the meeting.

FOMC announced that they anticipated the rate of economic growth would exceed their expectations in 2018 of its sustainable longer-run pace, according to the article. Fed members also expressed they expect the labor market conditions to continue strengthening.

“A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate,” the minutes said.

The FOMC minutes noted “that the pace of wage gains might not increase appreciably if productivity growth remains low.”

The minutes also noted a “number of participants had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the U.S. and abroad.”

All of which points to the best of all possible worlds for financial markets.

Minutes of the January meeting showed the U.S. central bank’s rate-setting committee grew more confident in the need to keep raising rates, with most believing inflation would perk up.

Some Federal Reserve watchers believe four increases could be in prospect, one more than implied by the “dot plot” of FOMC projections from the December meeting.

While stocks hover near their best levels of the session, the yield on the benchmark 10-year Treasury note is at its high for the current cycle, 2.92%, the highest since early 2014.

The report of a 2.9% year-on-year rate of gain in average hourly earnings in the January employment release sent the stock market reeling.

Stocks ended lower on Wednesday after the release of the minutes pushed yields on the benchmark 10-year U.S. Treasury note to a four-year high of 2.957 percent. They were last trading at 2.9335 percent.

During the January meeting, the FOMC elected not to raise the federal funds rate in January, in what was the last meeting chaired by Janet Yellen. Chair Janet Yellen had guided the Fed through the first rate normalization steps a decade after the financial situation.

FOMC members said they have revised upward the economic projections they made at the previous meeting in December.

Markets already were on edge after the January Fed meeting, during which the committee said it expected “further gradual adjustments” in monetary policy.

Now, the market is forecasting the Fed will raise interest rates during its March meeting, the first for successor Jerome Powell.

The Federal Open Market Committee meeting

The Federal Reserve Act of 1913 charged the Federal Reserve with setting monetary policy to influence the availability and cost of money and credit.

The Federal Open Market Committee (FOMC) meeting is a regular session held by the members of the Federal Open Market Committee, a branch of the Federal Reserve that decides on the monetary policy of the United States.

During these meetings, the FOMC reviews economic and financial conditions and determines the federal funds target rate

A decline in the target rate could stimulate economic growth; however, too much economic activity can cause inflation pressures to build. A rise in the rate limits economic growth and helps control inflation pressures; however, too great an increase can stall economic growth. The FOMC seeks a target rate that will achieve the maximum rate of economic growth.

A change in the federal funds rate can affect other short-term interest rates, longer-term interest rates, foreign exchange rates, stock prices, bond prices, the amount of money and credit in the economy, employment and the prices of goods and services.

So traders and investors around the world usually attempt to predict where monetary policy is headed next in each Fed meeting, and adjust their strategies and portfolios accordingly.

The Federal Funds Target Interest Rate

The federal funds rate is the interest rate that banks charge each other for overnight loans, meaning that it effectively acts as the base interest rate for the US economy. Changes to the federal funds rate will impact short and long-term interest rates, forex rates, and eventually economic factors like unemployment or inflation. This, in turn, will play out across the global economy.

While it doesn’t have a direct say over the rates charged by banks to lend money to each other, the FOMC can indirectly change the fed funds rate using three policy tools that affect money supply. These are open market operations, the discount rate, and reserve requirements.

Open market operations are the buying and selling of government bonds on the open market.

When the FOMC wants to decrease monetary supply it will sell bonds, taking money out of the economy and in turn raising interest rates. When it wants to increase money supply, it will buy bonds, injecting money into the economy and lowering rates.

As well as borrowing this money from each other at the federal funds rate, banks can borrow money directly from the Federal Reserve itself.

The interest rate a bank will have to pay to borrow from the Fed is called the discount rate. A lower discount rate will encourage a lower federal funds rate, and vice versa.

Reserve requirements are the percentage of a bank’s deposits from customers that it has to hold in order to cover withdrawals.

If reserve requirements are raised, then banks can loan less money and will ask for higher interest rates. If they are lowered, then the opposite happens.

Quantitative easing (QE) is an extra measure that the Fed can apply in times of severe financial situation. It is usually only used once the above policy tools have been exhausted.

In function, QE looks fairly similar to open market operations. The FOMC buys securities on the open market, injecting money directly into the system.

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