FOMC Minutes Show Leaning Toward Faster Pace of Hikes

by Ike Obudulu Posted on April 11th, 2018

Washington, D. C., USA:  The Federal Open Market Committee, FOMC, today, Wednesday, at 2 p.m. ET, published the minutes from its March meeting, when the Federal Reserve raised interest rates and increased its GDP forecast. The minutes released show that Federal Reserve officials leaned toward a slightly faster pace of tightening at their March meeting as their growth outlook and confidence in hitting their inflation target strengthened.

“A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected,” the Federal Open Market Committee said in the records of its March 20-21 meeting.

Ahead of the release of the minutes, treasurys rose as investors pivoted to perceived safe havens like Treasurys after President Donald Trump threatened missile strike in Syria.

The Treasury Department also auctioned $21 billion in 10-year notes at a high yield of 2.795 percent. The bid-to-cover ratio, an indicator of demand, was 2.46.

U.S. government debt prices rose Wednesday after President Donald Trump threatened a missile strike in Syria, telling Russia to “get ready.”

Prices also ticked upward after the Labor Department reported consumer prices fell short of Wall Street expectations.

Treasury yields fell immediately after the president tweeted his threat, as investors fled for perceived safe haven assets like bonds and gold.

The yield on the benchmark 10-year Treasury note was lower at around 2.795 percent at 1:03 p.m. ET, while the yield on the 30-year Treasury bond was lower at 3.008 percent. Bond yields move inversely to prices.

Mortgage rates remained steady as they have throughout the week.

U.S. consumer prices in the U.S. fell for the first time in 10 months in March, weighed down by a decline in the cost of gasoline. However, underlying inflation continued to firm amid rising prices for health care.

The Labor Department said on Wednesday its Consumer Price Index (CPI) fell 0.1 percent last month, its first since May 2017 and falling short of the Street’s expectations for no change.

Excluding the volatile food and energy components, the CPI climbed 0.2 percent, matching February’s increase. The so-called core CPI rose 2.1 percent year-on-year in March, the largest advance since February 2017, after increasing 1.8 percent in February.

The Treasury Department auctioned $21 billion in 10-year notes at a high yield of 2.795 percent. The bid-to-cover ratio, an indicator of demand, was 2.46. Indirect bidders, which include major central banks, were awarded 53.2 percent. Direct bidders, which includes domestic money managers, bought 8.4 percent.

Investors also with for the release with an eye on Washington, after the FBI raided the New York office and residence of Michael Cohen, the personal attorney to President Donald Trump, on Monday.

Turmoil within the administration has put markets on edge as of late, in addition to concerns over trade tensions between the U.S. and China.

The Federal Open Market Committee, (FOMC), of the Federal Reserve Board in March announced a quarter-point increase in interest rates  to – 1.50 – 1.75 % – as the policy making committee wound up its first two-day meeting under new Fed Chairman Jerome Powell. The Fed Dot Plot is anticipating two more hikes in 2018.

“The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” the FOMC said as it hiked rates in March signaling confidence in the economy.

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.

Leave a Reply