Summary
Per my expectation, the Federal Open Market Committee today announced its decision to increase the target rate on federal funds by 25 basis points, to 3.75% from 3.50%.
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The Federal Open Market Committee opted today to raise its target on the Federal Funds Rate to 3.75% from 3.50%. This marked the 11th rate increase in 11 policy meetings.
Concurrently, the Federal Reserve Board of Governors announced a quarter-point increase in the Discount Rate, to 4.75% from 4.50%.
In my view, following are the more critical portions of the FOMC's post-meeting statement:
"...The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.
"While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat...Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.
"...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. ..."
Relative to all the recent talk about a Fed "pause" in raising rates, the most critical portion of the above that holds over from prior statements is:
"...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. ..."
Thus, the Fed has left the door wide open for another 25 basis-point increase in the funds rate in November, at the next FOMC meeting (scheduled for 11/1). As of a around 2:30 PM (ET) today, the November and December federal funds futures contracts were trading at 3.94% and 4.02%, respectively.
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 2005 actions to date.
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2005 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 Sep. Meeting: 3.75% 4.75%
Opening '05 Levels: 2.25% 3.25%
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09/20 REGULAR MEETING, Action Taken:
+25bp to 3.75% +25bp to 4.75%
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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