Summary
Per the overwhelming expectation, the Federal Open Market Committee today announced its decision to increase the target rate on federal funds by 25 basis points, from 3.25% to 3.50%.
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Today's FOMC Meeting
As was universally expected, the Federal Open Market Committee opted today to raise its target on the Federal Funds Rate from 3.25% to 3.50%. Concurrently, the Fed Board of Governors announced a quarter-point increase in the Discount Rate, from 4.25% to 4.50%.
In my view, following are the more critical portions of the FOMC's post-meeting statement:
"The Committee believes that, even after this action, the stance of monetary policy remains accommodative.
"...Aggregate spending, despite high energy prices, appears to have strengthened since late winter.
"...Core inflation has been relatively low in recent months...but pressures on inflation have stayed elevated.
"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. ..."
The most critical portions holding over from prior statements are: "even after this action, the stance of monetary policy remains accommodative," and "the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."
Thus, the Fed has left the door wide open for another 25 basis-point increase in the funds rate in September, at the next FOMC meeting (scheduled for 9/20). In fact, at the moment, there is no reason to think the FOMC will stop hiking rates in September. As of a around 2:30 PM (ET) today, the December federal funds futures contract was trading at 4.09%.
The post-meeting statement can be accessed at the GRA website's "Topical Links" section (left-hand column), or at: FOMC Statement.
The following table shows the FOMC's actions from June of last year forward, showing the ten rate hikes in as many policy meetings.
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2005-2004 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 Aug. Meeting: 3.50% 4.50%
Opening '05 Levels: 2.25% 3.25%
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08/09 REGULAR MEETING, Action Taken:
+25bp to 3.50% +25bp to 4.50%
July NO SCHEDULED MEETING
06/29-30 REGULAR MEETING, Action Taken:
+25bp to 3.25% +25bp to 4.25%
05/03 REGULAR MEETING, Action Taken:
+25bp to 3.00% +25bp to 4.00%
April NO SCHEDULED MEETING
03/22 REGULAR MEETING, Action Taken:
+25bp to 2.75% +25bp to 3.75%
02/01-02 REGULAR MEETING, Action Taken:
+25bp to 2.50% +25bp to 3.50%
January NO SCHEDULED MEETING ----------->
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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 ------------>
09/21 REGULAR MEETING, Action Taken:
+25bp to 1.75% +25bpP to 2.75%
08/10 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%
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Yesterday's Treasury Auction
Yesterday, the Treasury auctioned $18.0 billion of three-year notes. The issue was sold at a market-clearing yield of 4.204%, and the auction had a bid-to-cover ratio of 2.31. By comparison, the three-year note auctioned in the May refunding went off at a market-clearing yield of 3.821%, with a bid-to-cover ratio of 2.38.
Total competitive and noncompetitive tenders yesterday were $41.545 billion, excluding an allotment of $2.287 billion to the Federal Reserve System. Additional details are contained in the table below.
To conclude its August refunding operation, the Treasury will auction $13.0 billion of five-year notes tomorrow, and $13.0 billion of 10-year notes on Thursday (8/10 and 8/11).
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RESULTS OF THE AUGUST 2005
TREASURY REFUNDING OPERATION
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Bid/
Auct. Amt. Cover Non-
Date (Bils) Maturity Coupon Yield Price Ratio Comp.#
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08/08 $18.0 08/15/08 4.125% 4.204% 99.779+ 2.31 $0.161
08/10 $13.0 08/15/10 <------ Not Yet Auctioned ------>
08/11 $13.0 08/15/15 <------ Not Yet Auctioned ------>
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#Amount of issue (in billions) awarded
based on non-competitive tenders submitted.
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