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 8/7/07 | ||||||||||
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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 only notable changes in the statements wording was an acknowledgement of recent volatility in the financial markets and tighter credit conditions for some households and wording that downside risks have increased. While the anti-inflation bias has been retained, the acknowledgement of increased downside risks is actually a baby step toward a neutral policy stance. Notably, the Fed still is in a wait and see stance on whether core inflation has come down on a sustainable basis. And the Fed sees the economy continuing on a moderate growth path despite volatility in the financial markets.
The Fed's new commentary on the economy is:
"Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy."
Unchanged were the comments on core inflation:
"Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures."
The new language on increased downside risks was tacked in front of the FOMC's identical comment on the upside inflation risks:
"Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information."
The bottom line is that the Fed is on hold but is one step closer to a neutral stance and several steps away from an actual cut in rates.
The FOMC announcement for the August 7 FOMC policy meeting is expected to leave the fed funds target unchanged where it has been since the June 2006 policy meeting. The big question is whether the Fed will change its anti-inflation bias in the statement and move to a neutral position. Given the recent string of good core inflation numbers, this may be the meeting in which the Fed makes that change in its policy stance.
FOMC Consensus Forecast for 12/12/06 policy vote on fed funds target: unchanged at 5-1/4 percent
Range: 87.6 percent probability for no change and 12.4 percent probability for a 25 basis point cut based on fed funds futures close on August 3
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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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