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 10/31/07 | ||||||||||
| ||||||||||
Highlights
The Federal Open Market Committee cut the fed funds target rate by 25 basis points as expected by the markets. The Fed also cut its discount rate by 25 basis points. The vote was not unanimous. The vote was 9-1 in favor to cut the fed funds rate. Kansas City Fed President Thomas Hoenig voted to keep the fed funds target rate unchanged. The fed funds target rate is now 4-1/2 percent and the discount rate is now 5 percent.
There are a few key points from the FOMC statement. First, the Fed was being forward looking in its decision to cut interest rates. Second, the FOMC seems to be telling the markets to not count on another rate cut soon - although another rate cut is not ruled out either. With today's rate cut, the Fed sees upside risks of too high inflation and downside risks for too weak growth as roughly balanced.
The Fed recognized that the latest GDP numbers for the third quarter indicated that the economy was growing at a substantial pace but that the impact of the housing correction will lead to a near-term slowing in growth. It was over concern about weak housing and "disruptions in financial markets" that was the basis for today's rate cut.
"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."
While the Fed acknowledges there has been improvement in core inflation this year, the Fed still sees upside risks from higher energy and commodity prices and other factors (likely still low unemployment).
Overall, the Fed appears to be taking a very balanced position and is not committing to further rate cuts at this point.
"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
Essentially, financial markets would be prudent to not rely on further rate cuts soon. Such would be favorable for the dollar and bond markets (more of an anti-inflation stance) but not so for equities.
The Fed's next policy meeting is scheduled for December 11.
The FOMC announcement for the October 30-31 FOMC policy meeting is expected to result in another interest rate cut by the Fed but by 25 basis points instead of the double whack of 50 basis points on September 18. Even though Fed officials have indicated that inflation was still its primary concern in the minutes of the September 18 FOMC meeting, subprime losses still haunt the financial sector and housing is still declining. Fed officials have repeatedly cautioned that they would be concerned if housing continued to be too weak for too long and spread weakness to other sectors of the economy - notably the consumer sector and manufacturing.
![[Chart]](chart.gif)
|
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. |
| 2007 Release Schedule | ||||||||||||||||||
|
powered by
![[Econoday]](../../../../../../../../../images/logo.gif){kind=logo}