Thoughts about Fomc
Fomc
PAUL KANGAS: It`s almost a forgone conclusion that the Federal Reserve`s open market committee will boost interest rates when it meets tomorrow. The Fed funds rate target is expected to go up 1/4 point to 4.25 percent. The Fed has been consistently moving rates higher since June of last year. But there is much less certainty over whether the Fed will signal that cycle of tightening is coming to an end. 1
Although it is little-known by the general public, the Federal Reserve’s FOMC (Federal Open Market Committee) has a significant impact upon the U.S. economy. The FOMC is made up of twelve members who meet at least eight times per year, according to philadelphiafed.org. Members include the presidents of twelve Federal Reserve banks, as well as a Board of Governors. The FOMC is responsible for regulating transactions in open market securities. Various economic statistics and predictions are presented at the meetings, then members discuss lowering or raising the federal funds interest rate and vote on what changes should occur. For example, the FOMC lowered the rate by 0.75% on March 18th. Banks must pay this rate when borrowing money from reserve funds that all banks are required to maintain. 2
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The expense to banks of paying the federal funds interest rate causes them to raise or lower the rates charged to customers on the various types of loans they offer, including credit cards, auto loans, and mortgages. This often affects the amount of purchases on credit that people make, thus indirectly impacting the stock market, inflation, employment levels, and other economic factors. Part of the FOMC and Federal Reserve’s intended goal is to promote economic prosperity and employment, without causing inflation to rise dramatically. It also makes decisions regarding international currency transactions, and releases statements on general trends or expectations for the economy. 3
The level of influence the FOMC has over the economy is largely dependent upon how many people use credit when making purchases. Interest rates would have little impact upon sales or inflation if most purchases were made using cash that has already been earned, as they are in some countries. However, the widespread usage of credit cards and consumer-oriented loans among Americans seems unlikely to change in the near future, thus ensuring that the FOMC continues to have a significant role. It is worth mentioning that federal funds rate changes are often indicated in “basis points” by the FOMC; these are equal to 1/100th of a percent, so a fifty basis point increase is the same as 0.5 percent. 4
In addition to eight regularly scheduled meetings, the FOMC can also meet on short notice in a case of national emergency or urgent need. The committee is capable of making rapid decisions to ward off potential economic instability, and the Federal Reserve Bank, along with the nation, relies upon the FOMC to make sound choices for the American economy. 5
For both announcements, the first sentence directly states the FOMC’s decision on rates. The language is clear, so as to allow Wall Street quick access to necessary rate specific information. As you will note, the FOMC held rates steady on Tuesday at 2%, versus the 25 basis-point cut in April, bringing the fed funds rate to the present 2%. 6
DHUE: Figuring out just what to say and getting the full open market committee to agree is tricky. Former Fed Governor Laurence Meyer expects the Fed to change its statement, keeping the language vague enough to give it flexibility, while still dealing with a transition to a new chairman. 7
The yield on this contract can be interpreted as a measure of a consensus forecast in the market of the average effective federal funds rate over the next calendar month. For example, the change in the yield on the one-month-ahead federal funds futures contract from the close of business yesterday until the close of business today is a measure of the impact of today’s news in the market. 8
Thoughts for today’s statement? A more balanced assessment of the risks going forward. The Fed likes the idea of keeping funds at 5.25% in the short run and letting the long end soften the blow to housing. Not too low, of course, and not too high (which is where the market might be going). 9
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Tags: auto loans, banks, board of governors, borrowing money, economic factors, economic prosperity, economic statistics, eight times, employment levels, fed funds rate, federal open market committee, federal reserve, federal reserve banks, fomc, forgone conclusion, international currency transactions, open market committee, org members, paul kangas, rate target, reserve funds
Tags: auto loans, banks, board of governors, borrowing money, economic factors, economic prosperity, economic statistics, eight times, employment levels, fed funds rate, federal open market committee, federal reserve, federal reserve banks, fomc, forgone conclusion, international currency transactions, open market committee, org members, paul kangas, rate target, reserve funds