Washington: Largely mirroring Federal Reserve Chairman Jerome Powell’s remarks in Congressional testimony earlier in the day, the minutes of the central bank’s June meeting released Wednesday afternoon said many participants believe the case for lowering interest rates has strengthened.
The minutes of the latest Fed meeting noted nearly all participants downwardly revised their assessment of the appropriate path for rates due to global developments that led to heightened uncertainties about the economic outlook.
“Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook,” the Fed said.
The central bank added, “Several others noted that additional monetary policy accommodation could well be appropriate if incoming information showed further deterioration in the outlook.”
The minutes revealed several participants believe a near-term rate cut could help cushion the effects of possible future adverse shocks to the economy and, hence, is appropriate from a risk-management perspective.
Some participants also warned a continued shortfall in inflation risked a softening of inflation expectations that could slow the sustained return of inflation to the Fed’s 2 percent target.
The Fed voted to leave the target range for rates at 2.25 to 2.50 percent at the meeting, although St. Louis Fed President James Bullard preferred cutting rates by 25 basis points to re-center inflation and inflation expectations.
Reflecting Powell’s previously mentioned crosscurrents, such as trade tensions and concerns about global growth, many participants believe the risks to their growth and inflation projections are now weighted to the downside.
“While they continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, many participants attached significant odds to scenarios with less favorable outcomes,” the Fed said.
The minutes added, “Many participants noted that, since the Committee’s previous meeting, the economy appeared to have lost some momentum and pointed to a number of factors supporting that view.”
The Federal Open Market Committee meeting
The Federal Reserve Act of 1913 charged the Federal Reserve with setting monetary policy to influence the availability and cost of money and credit.
The Federal Open Market Committee (FOMC) meeting is a regular session held by the members of the Federal Open Market Committee, a branch of the Federal Reserve that decides on the monetary policy of the United States.
During these meetings, the FOMC reviews economic and financial conditions and determines the federal funds target rate
A decline in the target rate could stimulate economic growth; however, too much economic activity can cause inflation pressures to build. A rise in the rate limits economic growth and helps control inflation pressures; however, too great an increase can stall economic growth. The FOMC seeks a target rate that will achieve the maximum rate of economic growth.
A change in the federal funds rate can affect other short-term interest rates, longer-term interest rates, foreign exchange rates, stock prices, bond prices, the amount of money and credit in the economy, employment and the prices of goods and services.
So traders and investors around the world usually attempt to predict where monetary policy is headed next in each Fed meeting, and adjust their strategies and portfolios accordingly.
The Federal Funds Target Interest Rate
The federal funds rate is the interest rate that banks charge each other for overnight loans, meaning that it effectively acts as the base interest rate for the US economy. Changes to the federal funds rate will impact short and long-term interest rates, forex rates, and eventually economic factors like unemployment or inflation. This, in turn, will play out across the global economy.
While it doesn’t have a direct say over the rates charged by banks to lend money to each other, the FOMC can indirectly change the fed funds rate using three policy tools that affect money supply. These are open market operations, the discount rate, and reserve requirements.
Open market operations are the buying and selling of government bonds on the open market.
When the FOMC wants to decrease monetary supply it will sell bonds, taking money out of the economy and in turn raising interest rates. When it wants to increase money supply, it will buy bonds, injecting money into the economy and lowering rates.
As well as borrowing this money from each other at the federal funds rate, banks can borrow money directly from the Federal Reserve itself.
The interest rate a bank will have to pay to borrow from the Fed is called the discount rate. A lower discount rate will encourage a lower federal funds rate, and vice versa.
Reserve requirements are the percentage of a bank’s deposits from customers that it has to hold in order to cover withdrawals.
If reserve requirements are raised, then banks can loan less money and will ask for higher interest rates. If they are lowered, then the opposite happens.
Quantitative easing (QE) is an extra measure that the Fed can apply in times of severe financial situation. It is usually only used once the above policy tools have been exhausted.
In function, QE looks fairly similar to open market operations. The FOMC buys securities on the open market, injecting money directly into the system.