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
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Highlights
The Federal Open Market Committee kept the target for the federal funds rate unchanged at 5-1/4 percent and retained its anti-inflation bias. The statement should be interpreted as the Fed moving no more than incrementally closer to easing - if even that.
According to the Fed statement:
"Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.
Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.
The markets reacted to the statement with implied fed funds rates edging down marginally - indicating a small shift toward the view that the Fed will be easing later this year.
However, the FOMC statement is mixed in terms of supporting that view. The Fed appears to be explicitly playing the role of central banker - focusing on the long term. The key emphasis is on inflation with emphasis on "the high level of resource utilization" - most likely focusing on tight labor markets.
The key information in the statement is what is not in the statement. Markets are likely focusing on the fact that the statement no longer includes a specific reference to "any additional firming" but instead is more balanced with "Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." This is incrementally more balanced than the previous statement but the Fed goes out of its way to emphasize "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected." This means the anti-inflation bias remains.
The other key item missing is any reference to more recent housing woes related to sub-prime lender problems. The Fed is making a point that its job is not to rescue isolated mistakes by participants in some facet of the financial markets but to focus on the long-term responsibility of maintaining low inflation. The Fed, of course, would respond to a financial crisis that is systemic but not isolated misjudgment. We may gain more insight into the Fed decision with Fed Speak starting tomorrow with three FOMC members on the speaking circuit - including Chairman Bernanke.
The FOMC announcement for the March 20-21 FOMC policy meeting is due out Wednesday afternoon. The Fed has kept the fed funds target rate unchanged at 5-1/4 percent since the last 25 basis point increase at the June 2006 meeting. Few expect the Fed to actually cut rates this meeting but prior to last week's strong inflation numbers a growing number were expecting the Fed to change from an anti-inflation bias to a neutral bias - the first step toward cutting rates. While the inflation numbers may have shaken that view, one should remember that the Fed has emphasized that it is making policy decisions not just on current data but also based on their forecasts. This means that market attention should still focus on any changes in the statement on the Fed's views of risks for inflation versus risks for too weak economic growth.
FOMC Consensus Forecast for 12/12/06 policy vote on fed funds target: unchanged at 5-1/4 percent
Range: 98 percent probability for no change versus 2 percent for a quarter point cut
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The Fed closely monitors the core PCE deflator to indicate whether or not policy is approximately correct, overly accommodative, or too restrictive. The PCE deflator 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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