Washington, D. C., USA: The Federal Open Market Committee, FOMC, today, Wednesday, at 2 p.m. ET, published the minutes from its May meeting, when the Federal Reserve left the benchmark interest rate unchanged in a target range of 1.5 to 1.75 per cent after it’s two-day policy meeting. FOMC Meeting Minutes released today showed support for a june rate hike.
Most participants in Fed’s policy meeting felt it would ‘soon be appropriate’ to raise interest rates again if economic outlook remained intact – minutes.
Some said uncertainty around trade policy outcomes could dampen business sentiment and spending.
Many saw little evidence of general overheating of labor market with wage pressures ‘still moderate’.
Federal Reserve May meeting minutes showed next rate hike likely coming soon and signals acceptance of a modest inflation overshoot.
A temporary period of inflation “modestly above 2 percent would be consistent with the committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations,” according to the minutes.
“It was noted that it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the committee’s 2 percent objective,” the minutes said.
The FOMC Meeting Minutes is a detailed record of the FOMC’s most recent meeting, providing in-depth insights into the economic and financial conditions that influenced their vote on where to set interest rates;
The FOMC Meeting Minutes is scheduled eight times per year, three weeks after the Federal Funds (benchmark) Rate is announced;
A more hawkish tone in the FOMC Meeting Minutes than expected is good for the dollar.
The Federal Reserve is expected to steadily raise interest rates this year, which could drive up the cost of existing debts with
mortgage, student loans and credit cards being of special interest for consumer finance.
The market has already started anticipating rate hikes by the Federal Reserve, and you should too.
Federal Reserve (central bank) officials have said they are planning to raise rates three times this year. That could go up to four hikes, depending on how June unemployment rate numbers play out.
The Federal Reserve’s monetary policy committee earlier confirmed that inflation which is the “price stability” part of its dual mandate from Congress, has risen to almost hit its long-undershot goal of a 2-per-cent annual rate.
FOMC revised its outlook for inflation, after its 2% target was met in the government’s latest economic data.
After the Commerce Department’s index of household spending – the central bank’s preferred inflation gauge – was reported at 2 per cent in March, the Fed said that inflation had “moved close” to the target.
The next interest rate hike is expected in June. Though, the Fed left monetary policy unchanged with the likely path for rate hikes remaining “gradual”, with activity rising moderately and inflation having “moved close” to 2%, the U.S. looks set for a June rate hike.
The economy appears to have regained momentum following a soft run in January and February. The combination of rising wages and employment together with huge tax cuts means the domestic demand story looks robust while the lagged effects of the softer dollar gives US exporters a competitive edge to benefit from stronger global demand.
As such, the balance of risks is skewed towards a more aggressive Fed response to combat fears of economic overheating. The expectation is for a June rate hike followed by two further 25 basis point moves in the second half of the year. Markets are divided on the possibility of a fourth rate hike.
In an update, one of the more hawkish central bankers when it comes to monetary policy, Philadelphia Fed President Patrick Harker later said – at a conference in Dallas about technology and disruption – that he envisions a scenario where the Federal Reserve increases its benchmark overnight rate three times total in 2018 and three more times next year, then stops as the economy hits equilibrium.
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.