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 6/28/07 | ||||||||||
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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 vote was 10 to 0 in favor of no change. The Fed statement noted that economic growth has improved since the last FOMC meeting, changing from "economic growth has slowed in the first part of this year" to "economic growth appears to have been moderate during the first half of this year." The current statement continues to see an ongoing adjustment in the housing sector. The FOMC noted improvement in core inflation, changing the wording on that issue from "core inflation remains somewhat elevated" to "readings on core inflation have improved modestly in recent months." The Fed stated that the improvement in core inflation "has yet to be convincingly demonstrated" and that high levels of resource utilization (implicitly the labor market) could sustain inflation pressures. The key section on the policy concerns was completely unchanged, focusing on risks for inflation failing to moderate.
"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." The Fed's outlook for real economic growth seems unchanged, expecting the economy to "expand at a moderate pace over coming quarters."
The bottom line is that the Fed remains on hold. Interest rates are not likely to come down this year. The current FOMC statement is very much within expectations and likely will not have much impact on the markets. However, there is always a chance that bond and equity markets could have a sigh of relief that the Fed did not turn more hawkish mild rallies. However, the immediate market reactions were mixed. Equities rose marginally while bond prices dipped. For some time, bond traders have been reacting more negatively to Fed statements than the equity markets.
The Federal Reserve has been on hold on monetary policy since the last 25 basis point increase on June 29, 2006. While core inflation numbers have been favorable recently, other factors are keeping inflation the primary concern for the Fed. Labor markets remain tight and food and energy inflation are threatening to spill into core inflation. And many economists expect second quarter GDP growth to exceed 3 percent. Essentially no one is expecting the Fed to cut rates at the end of the June 27-28 FOMC meeting but markets will be carefully reading the FOMC announcement for any changes in the Fed's anti-inflation bias.
FOMC Consensus Forecast for 6/28/06 policy vote on fed funds target: unchanged at 5-1/4 percent
Range: 100 percent probability for no change based on fed funds futures
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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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