The Federal Open Market Committee consists of the seven Governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year in order to determine the near-term direction of monetary policy. Changes in monetary policy are now announced immediately after FOMC meetings. Why Investors Care
| Released on 1/30/08 | ||||||||||
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Highlights
The FOMC gave the markets what they wanted today with a 50 basis point cut in both the fed funds target rate and the discount rate. The fed funds target rate is now 3.0 percent and the discount rate is now 3.5 percent. The rate cuts met market expectations. The Fed stated that the reasons for the cuts included "considerable stress" remaining in financial markets, deepening weakness in housing, and a softening in the labor market. The FOMC noted that "downside risks remain." There was one dissenting vote-Richard Fisher, the Dallas Fed president who wanted no change in rates. The fed funds target rate is at its lowest since June 29, 2005, the day before the Fed raised the target to 3.25 percent.
The key paragraph explaining the Fed rate cuts is:
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."
Despite the one dissenting vote, the fact that nine of the twelve Federal Reserve Banks requested a 50 basis point cut in the discount rate indicates that there was broad support for the large cut. The discount rate requests must be voted on by the directors of each district bank in advance of the submission to the Board of Governors. The requests were submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco. As standard procedure, the remaining three banks will request rate changes as soon as their directors can meet by conference call.
Today's FOMC statement clearly shows the Fed choosing to take out more anti-recession insurance. In doing so, the Fed still must be concerned about potential inflation. Currently, the Fed "expects inflation to moderate in coming quarters" and if inflation numbers do not come down in coming months, the Fed will have to consider when to raise rates. But for now, the emphasis apparently is on anti-recession insurance.
Equities rallied on today's FOMC minutes but the dollar tanked.
The Fed's next policy meeting is scheduled for March 18. However, the minutes of today's FOMC meeting are scheduled for release on February 20 and will include the FOMC's latest forecasts for the economy.
The FOMC announcement for the January 29-30 FOMC policy meeting is expected to result in another cut in the fed funds target rate. The Fed is still coming off a rare emergency rate cut in between scheduled meetings on January 22. With the Fed having cut the fed funds target rate by 175 basis points from 4.25 percent in early August to the current 3.50 percent, how much "ammunition" will the Fed be willing to use so soon? And will the markets overreact if the Fed cuts less than expected?
FOMC Consensus Forecast for 1/30/08 policy vote on fed funds target: 3.00 percent
Range: 76 percent probability for a 50 basis point cut to 3.00 and 24 percent probability for a 25 basis point cut to 3.25 percent based on fed funds futures on January 24
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The Fed closely monitors the core PCE price index to indicate whether or not policy is approximately correct, overly accommodative, or too restrictive. The PCE price index is prefered to the CPI because it is more closely aligned to the cost of living than the CPI (which measures a fixed basket of goods & services.) This chart covers monthly data and the fed funds target rate reflects the monthly average. As such, it will not correspond to the most recent fed funds rate target announced by the Fed. |
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