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 6/25/08 | ||||||||||
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Highlights
An early release of the FOMC announcement kept the fed funds target rate at 2.00 percent as expected with the discount rate at 2.25 percent. The vote was not unanimous as Dallas Fed President Richard Fisher voted against with a preference for raising the fed funds target. The vote was 9 to 1 in favor of no change. While the FOMC sees risks for too low growth and for too high inflation, the Fed has further shifted its concern to be more about inflation than about recession. While the Fed is keeping its options open about the timing of any change in monetary policy, the statement suggests that the Fed is preparing markets for a rise in interest rates sometime in the not far off future.
Indeed, the Fed still sees downside risks, with the key issues being financial markets still under "considerable stress," among other factors.
"Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."
Even though the Fed is sticking with its forecast for a moderation in inflation, the FOMC sees higher oil and other commodity prices as being problematic. The statement also references the "elevated state of some indicators of inflation expectations" - strongly suggesting that the Fed is concerned about inflation expectations becoming unanchored.
"The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."
The shift in Fed thinking is emphasized by the statement's comparison with no apparent change in downside risks to growth while upside risks to inflation have increased.
"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."
The bottom line is that the Fed is remaining flexible but it is clear that the Fed is now thinking about when to start raising interest rates to contain inflation.
Equities rose on the release of the FOMC announcement.
The FOMC announcement for the June 25 policy meeting is expected to leave rates unchanged at 2.00 percent for the fed funds target rate and at 2.25 percent for the discount rate. The previous FOMC statement and latest minutes indicated that risks were balanced between too low growth and too high inflation. Additionally, Fed officials have repeatedly stated in speeches that fighting inflation is now the higher priority. There likely will be no surprise on interest rates but markets will be parsing the wording of the FOMC statement for any indication on how soon the Fed may or may not be raising interest rates.
FOMC Consensus Forecast for 6/25/08 policy vote on fed funds target: unchanged at 2.00 percent
Range: 90 percent probability for no change based on fed funds futures June 20, versus 10 percent probability for 25 basis point increase
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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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