Highlights. Economic activity gets an upgrade from “rising moderately” to “rising at a solid rate” in an FOMC statement that should keep expectations firmly centered on a rate hike at the next meeting in December. The statement downplays the effects of hurricanes, which it says are unlikely to affect the course of the economy, and it describes near term risks as roughly balanced.
Aside from September’s drop in payrolls, the statement says the labor market continues to strengthen noting the dip in the unemployment rate to 4.2 percent. Household spending is still described as moderate while rising strength is still the description for business investment. Inflation, outside a post-hurricane jump for gasoline, is still described as soft
The Fed funds rate remains between 1.00 and 1.25 percent with the vote 9-0. There is little initial reaction in either the stock or bond markets to today’s results.
Market Consensus Before Announcement
The Federal Open Market Committee is expected to hold their federal funds target at a 1.00 to 1.25 percent range with a 1.125 percent midpoint. Econoday’s sample is unanimous with no expectations for a rate hike. Language on inflation and spare capacity in the labor market will be closely watched following recent pressure in average hourly earnings. Hurricane effects, and whether they’re described as temporary, will also be watched. Though a pass is the call for this meeting, the FOMC is widely expected to raise the funds target at their December meeting.
The Federal Open Market Committee (FOMC) is the policy-making arm of the Federal Reserve. It determines short-term interest rates in the U.S. when it decides the overnight rate that banks pay each other for borrowing reserves when a bank has a shortfall in required reserves. This rate is the fed funds rate. The FOMC also determines whether the Fed should add or subtract liquidity in credit markets separately from that related to changes in the fed funds rate. The Fed announces its policy decision (typically whether to change the fed funds target rate) at the end of each FOMC meeting. This is the FOMC announcement.
The announcement also includes brief comments on the FOMC’s views on the economy and how many FOMC members voted for and how many voted against the policy decision. Since the last recession, the statement also includes information on Fed purchases of assets, so-called “quantitative easing”, which affects longer-term interest rates. Also, a key part of the announcement is guidance on potential changes in policy rates or asset purchases.
The Fed determines interest rate policy at FOMC meetings. These occur roughly every six weeks and are the single most influential event for the markets. For weeks in advance, market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.
The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars. When bonds yield 5 percent, they will attract more money away from stocks than when they only yield 3 percent.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, fewer homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.
The Fed also began quantitative easing during the past recession and extended its bond purchases to late 2014. In late 2015, the Fed began to raise its federal funds target.
Econoday lists a separate “FOMC Meeting Begins” only for the first day of two-day policy meetings. Otherwise, “FOMC Meeting Announcement” serves the same purpose for one-day FOMC meetings since the announcement takes place just after the meeting concludes.