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Summary
Per the expectation of virtually everyone, the Federal Open Market Committee today announced its decision to increase the target rate on federal funds by 25 basis points, from 2.50% to 2.75%. Concurrently, the Federal Reserve Board of Governors announced a quarter-point increase in the Discount Rate, from 3.50% to 3.75%. As I expected, the post-meeting statement did contain some critical shifts, although they were subtle ones.
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The FOMC has raised its target rate on federal funds seven times since the end of June 2004. All increases have been 25 basis points in magnitude, thereby bringing the funds rate from 1.00% to its current 2.75%.
Nevertheless, fed funds remain below the inflation rate, even if you accept that the latest reported 2.9% year-over-year change in the Consumer Price Index adequately portrays inflation.
(NOTE: The latest consumer price data available is through January, with the February numbers scheduled to be released tomorrow morning.)
I and few people I know believe the claim that the cost of living is a mere 2.9% higher than a year ago. Nevertheless, the Federal Reserve has continued to echo its theme of the last many months that there was no inflation or danger thereof. But today's post-meeting statement potentially represents an ever so slight modification so evident in this prior tenacity.
The latest statement continues to frame FOMC policy in language not materially different than in communiques coming out of meetings over the last several months, but there are a couple subtle changes. As I assess today's installment, here are its key points:
"The Committee believes that, even after this action, the stance of monetary policy remains accommodative and...is providing ongoing support to economic activity...Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.
"The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. ..."
Within the context of the discussion in yesterday's research missive "Tomorrow at the FOMC", "accommodative" stays, as does "measured." However, "pressures on inflation have picked up in recent months and pricing power is more evident" represents a subtle but important change.
Also representing a subtle but important shift is "with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal." Of particular significance here is the phrase "should be kept roughly equal," with special emphasis on "roughly."
I believe these shifts put in place the foundation for a more discernibly hawkish bias in coming meetings. Apparently the bond market agrees, at least initially, as open-market yields across the Treasury curve have risen sharply after the announcement.
If you would like to read the entire document, you can find it either in the "Topical Links" section of the GRA website or by using the following link: FOMC Statement.
The following table brakes out the Federal Reserve's policy decisions from today's meeting back through the beginning of 2001. In early January of 2001, the central bank began a rate-cutting initiative that saw the fed funds rate go from 6.5% then, to 1% in late June of 2003.
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2005-2001 SCHEDULED MEETINGS OF THE FEDERAL
OPEN MARKET COMMITTEE AND POLICY ACTIONS TAKEN
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Action Taken On
Meeting --------------------------------
Date Fed Funds Rate Discount Rate
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2005
Thru 3/22 Meeting: 2.75% 3.75%
Opening '05 Levels: 2.25% 3.25%
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03/22 REGULAR MEETING, Action Taken:
+25bp to 2.75% +25bp to 4.00%
02/01-02 REGULAR MEETING, Action Taken:
+25bp to 2.50% +25bp to 3.50%
January NO SCHEDULED MEEGING ----------->
==============================================
2004
Closing '04 Levels: 2.25% 3.25%
Opening '04 Levels: 1.00% 2.00%
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Action Taken On
Meeting --------------------------------
Date Fed Funds Rate Discount Rate
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12/14 REGULAR MEETING, Action Taken:
+25bp to 2.25% +25bp to 3.25%
11/10 REGULAR MEETING, Action Taken:
+25bp to 2.00% +25bp to 3.00%
October NO SCHEDULED MEETING ------------>
9/21 REGULAR MEETING, Action Taken:
+25bp to 1.75% +25bpP to 2.75%
8/10 REGULAR MEETING, Action Taken:
+25bp to 1.50% +25bp to 2.50%
July NO SCHEDULED MEETING ------------>
06/29-30 REGULAR MEETING, Action Taken:
+25bp to 1.25% +25bp to 2.25%
05/04 REGULAR MEETING, No Action Taken
April NO SCHEDULED MEETING ------------>
03/16 REGULAR MEETING, No Action Taken
February NO SCHEDULED MEETING ------------>
01/27-28 REGULAR MEETING, No Action Taken
==============================================
2003
Closing Levels: 1.00% 2.00%*
Opening Levels: 1.25% 0.75%
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12/09 REGULAR MEETING, No Rate Action;
policy bias shifted to a neutral
stance, the first step towards
possible rate increases in 2004.
November NO SCHEDULED MEETING ------------>
10/28 REGULAR MEETING, No Action Taken
09/16 REGULAR MEETING, No Action Taken
08/12 REGULAR MEETING, No Action Taken
July NO SCHEDULED MEETING ------------>
06/24-25 REGULAR MEETING, Action Taken:
-25BP to 1.00% -25BP to 2.00%*;
policy bias left unchanged, leav-
door open to possible additional
rate cut(s).
05/06 REGULAR MEETING, No Rate Action;
policy bias shifted to favoring
possible additional rate cut(s).
April NO SCHEDULED MEETING ------------>
03/18 REGULAR MEETING, No Action Taken
February NO SCHEDULED MEETING ------------>
01/28-29 REGULAR MEETING, No Action Taken
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*Method for setting Discount
Rate changed during 2002.
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2002
Closing Levels: 1.25% 0.75%
Opening Levels: 1.75% 1.25%
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12/10 REGULAR MEETING No Action Taken
11/06 REGULAR MEETING, Action Taken:
-50BP to 1.25% -50BP to 0.75%;
policy bias shifted to "neutral."
October NO SCHEDULED MEETING ------------>
09/24 REGULAR MEETING, No Action Taken
08/13 REGULAR MEETING, No Rate Action;
policy bias shifted to favoring
possible additional rate cut(s).
July NO SCHEDULED MEETING ------------>
06/25-26 REGULAR MEETING, No Action Taken
05/07 REGULAR MEETING, No Action Taken
April NO SCHEDULED MEETING ------------>
03/19 REGULAR MEETING, No Rate Action;
policy bias shifted to "neutral"
February NO SCHEDULED MEETING ------------>
01/29-30 REGULAR MEETING, No Action Taken
==============================================
2001
Closing Levels: 1.75% 1.25%
Opening Levels: 6.50% 6.00%
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12/11 REGULAR MEETING, Action Taken:
-25BP to 1.75% -25BP to 1.25%
11/06 REGULAR MEETING, Action Taken:
-50BP to 2.00% -50BP to 1.50%
10/02 REGULAR MEETING, Action Taken:
-50BP to 2.50% -50BP to 2.00%
09/17 NO MEETING, Interim Action Taken:
-50BP to 3.00% -50BP to 2.50%
08/21 REGULAR MEETING, Action Taken:
-25BP to 3.50% -25BP to 3.00%
July NO SCHEDULED MEETING ------------>
06/26-27 REGULAR MEETING, Action Taken:
-25BP to 3.75% -25BP to 3.25%
05/15 REGULAR MEETING, Action Taken:
-50BP to 4.00% -50BP to 3.50%
04/18 NO MEETING, Interim Action Taken:
-50BP to 4.50% -50BP to 4.00%
April NO SCHEDULED MEETING ------------>
03/20 REGULAR MEETING, Action Taken:
-50BP to 5.00% -50BP to 4.50%
Feb. NO SCHEDULED MEETING ------------>
01/30-31 REGULAR MEETING, Action Taken:
-50BP to 5.50% -50BP to 5.00%
01/04 NO MEETING, Interim Action Taken:
-25BP to 5.50%
01/03 NO MEETING, Interim Action Taken:
-50BP to 6.00% -25BP to 5.75%
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