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 3/18/08 | ||||||||||
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Highlights
The FOMC surprised the financial markets by actually not giving them everything they wanted and cut the fed funds rate target and discount rate by 75 basis points instead of the expected 100 basis points. The fed funds target rate is now 2.25 percent and the discount rate is now 2.50 percent. The vote was not unanimous -Dallas Fed President Richard Fischer and Philadelphia Fed President Charles Plosser dissented, preferring less aggressive easing. Fisher had dissented at the January FOMC meeting. The markets reacted little to the announcement initially.
The Fed cut rates due to a downgrade in its view of where the economy is headed. "Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."
The FOMC indicated that downside risks to the economy remain and implicitly is keeping options open for further rate cuts. However, the meeting statement implied that recent measures to improve liquidity in credit markets is likely a key reason the Fed did not cut as much as expected. "Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity."
The other reason the Fed may not have been as aggressive is a concern that inflation is still a problem. The statement gave considerable attention to the problem that inflation has not come down as the Fed had hoped. "Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully."
The bottom line is that unless the economy deteriorates much more sharply than the Fed says it expects then the Fed is about at the end of the easing cycle. While it may be a while before rates head back up, it is unlikely the Fed is going to cut much more if at all.
The next FOMC meeting is scheduled for April 29-30.
The FOMC announcement for the March 18 FOMC policy meeting is expected to cut the fed funds rate sharply by 100 basis points with the markets moving to this extreme belief after this past Friday's Fed/JP Morgan rescue of Bear Stearns. The fed funds futures market has the odds just over 50 percent for a 100 basis point cut with a 100 percent probability priced in for at least a 75 basis point cut. Nonetheless, the Fed has a lot to mull over in terms of how to best stabilize the credit markets and stave off recession. Economic data have been weak but last week's intervention for Bear Stearns appeared to have unnerved the markets. So, whether the Fed goes for 75 or 100 basis points, the question remains whether the move helps to soothe the markets.
FOMC Consensus Forecast for 3/18/08 policy vote on fed funds target: down 100 basis points to 2 percent
Range: 52 percent probability for 100 basis point cut and 48 percent probability for 75 basis point cut based on fed funds futures settle for March 14, 2008
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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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