Federal Reserve Minutes Reassure on Rate Rise
The Federal Open Market Committee (FOMC) released minutes from its March 18-19 meeting today, revealing a less-certain future for a rising federal funds rate.
Much of the minutes reiterated what is already known or has already been stipulated by current Fed Chair Janet Yellen: Economic activity took a mostly weather-related hit earlier this year, employment is generally expanding, and inflation is running below average, but with expectations for a longer-term steady increase.
But what Mr. Market seemed to find most interesting today was increased insight into the Fed's lack of certainty regarding its larger monetary role. While the Fed has recently been backing off its bond buying, it's less clear whether that makes the Fed's next move an increase in the federal funds rate.
The federal funds rate is the interest rate at which large financial institutions lend and borrow money from their balances with the Federal Reserve, which affects the interest rates for all loans. By keeping the federal funds rate low, the Federal Reserve aims to promote borrowing money and discourage saving it, a recipe for increased economic activity.
With the Fed's cutback on bond buying -- down from $85 billion a month to $55 billion a month approved at the March meeting -- Mr. Market has been getting increasingly nervous that the Fed might also raise the federal funds rate. If the Fed raises its target rate, then economic growth could take a hit, adversely affecting financial markets.
These latest meeting minutes show that such a simple step-wise process may not be as clean-cut or happen as soon as many expected. A "number of participants" expressed concern that fund target rate projections were too high, and "most participants" wanted to make sure the new upward target "did not imply a change in the Committee's policy intentions."
Fund target rate projections are essentially hints that the Fed gives to markets to soften the impact of any seemingly sudden decision. These minutes show that the Fed might have hinted too hard, and projections of a rising rate aren't set in stone.
Although that means the FOMC is arguably telling investors things are still just as bad as they thought they were, they're also reassuring markets that cheap money isn't going anywhere anytime soon.
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