Investors look to FOMC economic projections for guidance

Like a doctor-patient relationship, so, too, is the Federal Open Market Committee (FOMC) vis-à-vis the US economy. A visit to the doctor can be a routine, uneventful experience. However, if the patient is ill or if the doctor finds unexpected health problems, the prognosis moving forward can have a significant impact on the patient’s life, be it financially or as to how they conduct their daily routine. The doctor’s goal is to help the patient return to a healthy life. It will come as no surprise, therefore, that investors, traders and just about anyone who stands to be affected by the status of the US economy is interested in the FOMC’s economic projections and policies that they plan to implement. Will the FOMC report on a strong economy moving towards its goals? Or will the committee make significant policy changes?

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Upcoming March meeting and FOMC projections

The FOMC is scheduled to meet on March 1617, and their meeting will take place against a backdrop of good news: the rate of Covid19 hospitalisations down, millions of Americans receiving vaccinations daily, easing CDC guidelines, increased passenger air travel, businesses and entertainment reopening and a new stimulus package just signed into law. 

Despite the positive developments, investors are worried about inflation. Federal Reserve Chair, Jerome Powell, has tried to allay these fears, saying it will not be an issue in the near future, even if the unemployment rate drops to pre-pandemic levels. However, investors are concerned that if prices surge as the economy reopens, inflation will rise. 

The expectation from the upcoming FOMC meeting is that interest rates will remain at their current levels of between 00.25%, and asset purchases will continue at the same pace. However, it remains to be seen how the committee will address the volatile Treasury market. 

At the culmination of the meeting, the committee will publicise its latest economic projections. Apart from understanding FOMC policy, it is instructive to read the minutes of the meeting also publicised on the Federal Reserve website, which provide insight into the issues discussed and what the committee thinks about those issues. An astute reader might even be able to gain insight into future policy from reading it. 

Previous FOMC meeting projections

The FOMC meets eight times a year, although it can schedule emergency or additional meetings if necessary. An example of this occurred on March 15, 2020, when the FOMC held an emergency meeting during which it lowered the interest rate to a range of between 0%0.25%. At the time, the committee statement said that it would maintain this target range “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Only two weeks prior, it had lowered the interest rate to between 1%1.25%, an action taken in light of the risks the coronavirus posed to economic activity, even though at the time, the economy remained strong. Other actions taken at the meeting to support FOMC’s goal of “maximum employment and price stability” were to:

  • Increase its holdings of treasury securities by at least $500 million
  • Increase its holdings of agency mortgage-backed securities by at least $200 billion

Since March 15, 2020, the FOMC has maintained interest rates between 0%0.25%, explaining that this rate will remain until labour market conditions have reached the FOMC’s assessment of maximum employment and inflation has risen to 2% and is on track to “moderately exceed 2 percent for some time.” This was the general statement regarding interest rates after the FOMC’s September, November, and December 2020 meetings and after the first meeting of 2021 at the end of January. As previously mentioned, investors are anxious to know what the FOMC will decide regarding interest rates in its upcoming meeting.

What is the FOMC?

Created in 1913 through legislation by Congress, the Federal Reserve System, known as “the Fed,” is the central bank of the US. It was established with the goal of providing the US with “a safer, more flexible, and more stable monetary and financial system.” The Federal Open Market Committee, along with the Federal Reserve Board of Governors and the Federal Reserve Banks are the three entities that make up the Federal Reserve system

The FOMC consists of 12 members: seven members of the Federal Reserve Board of Governors, including the Chair of the Board, the President of the Federal Reserve Bank of New York and the four rotating representatives from Federal Reserve Banks across the 11 regions of the United States.  

The stated goal of the FOMC is to implement monetary policy that promotes “effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The purpose of their meetings is to make decisions on monetary policy, review economic and financial conditions and assess price stability and employment output. It is the body of the Fed that sets national monetary policy, makes all decisions concerning the conduct of open market operations and communicates with the public about the likely future course of monetary policy. One job of the Federal Reserve Banks, split across 12 regions in the US, is to gather regional data and information which assist the FOMC and the Board of Governors in its policy decisions.

The FOMC’s influence can be exemplified in the case of changing the fed funds rate which in turn influences interest rates. For example, if the fed funds rate is raised, the cost of home mortgages, loans and credit cards will increase. If the fed fund rate is lowered, then the opposite happens.

Information about the upcoming FOMC meeting can be found here.

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