FOMC Retains Benchmark Interest Rate As Expected

by Ike Obudulu Posted on August 1st, 2018

Washington, D. C., USA:  The Federal Open Market Committee, FOMC, retained the benchmark interest rate at it’s present corridor of 1.75%-2% at the end of it’s two-day policy meeting on Wednesday – in line with expectations.

The committee went on to note that “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth.

The statement also noted that household spending, along with business fixed investment, has “grown strongly.”

The statement said the labor market has “continued to strengthen,” language consistent with the June meeting.

However, the committee went on to note that “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth.

In addition, the statement noted that household spending, along with business fixed investment, has “grown strongly.” That, too, is an improvement from June’s characterization that household spending has “picked up.”

The Fed will reinforce bets on a move in September if it repeats a reference to further gradual rate hikes in the accompanying policy statement.

Federal Reserve Chairman Jerome Powell had earlier signaled the U.S. central bank could take a break from increasing interest rates at some point. His colleagues are now debating how quickly to consider such a pause.

Pricing in federal funds futures contracts show almost zero expectation for a move at this meeting versus a probability a little above 80 percent in September.

Powell told Congress on July 17 that gradual rate moves were the plan “for now,” which is the kind of qualifier the committee could add to its statement to hint at a future breather in the tightening campaign.

“Given that there’s no visible inflation threat — not in the data and not in the FOMC forecasts — it makes sense to inject conditionality on future moves,” said Roberto Perli, a former Fed economist who is a partner at Washington-based consultancy Cornerstone Macro LLC. “So the ‘for now’ language seems appropriate and seems likely to make it into the statement, if not this time, soon.”

The Fed is trying to keep the U.S. economic expansion on track after growth was buoyed by strong consumer spending in the second quarter following tax cuts, and as it closes in on the central bank’s twin goals: Stable prices, which it defines as 2 percent inflation, and maximum employment.

Policy makers are close on inflation after undershooting their target for years, and are arguably already past the level of long-term sustainable full employment, with the jobless rate at 4 percent in June. They’ve raised rates twice this year and have two more moves penciled in for 2018, according to forecasts that officials updated in June.

The FOMC is also considering changing its description of monetary policy from “accommodative” to something closer to neutral, the committee indicated in minutes of its June meeting. But with Powell not scheduled to brief the media on Wednesday, the easiest course would be to keep the statement’s guidance nearly identical to its June meeting.

“I don’t expect any major change in the message because Powell will not be holding a press conference to clarify it,” said Ward McCarthy, Jefferies LLC chief financial economist. “They do seem to be trying to update where they are on the policy normalization path, and that’s going to be a communications challenge.”

Powell’s next scheduled press conference will be after the FOMC meeting on Sept. 26.

Here is the full FOMC statement

“Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Esther L. George; Loretta J. Mester; and Randal K. Quarles”


Decisions Regarding Monetary Policy Implementation

The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee (FOMC) in its statement on August 1, 2018:

  • The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 1.95 percent, effective August 2, 2018.
  • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

“Effective August 2, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $24 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $16 billion. Small deviations from these amounts for operational reasons are acceptable.

The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

  • In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 2.50 percent.

This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy.

Market Reaction

Stocks slipped to their lows of the session initially after the 2 p.m. EDT release of the FOMC policy statement, but trimmed those losses slightly. The Dow Jones Industrial Average was off about 70 points, after having been down about 120 right after the Fed news.

In the bond market, the 10-year Treasury note remains right around the 3% mark, which it touched earlier in the session. Expectations for rate increases at coming FOMC confabs barely budged in the federal funds futures market.

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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