The announcement of whether the Federal Reserve has increased, decreased or maintained the key interest rate. The FOMC meets eight times per year to decide on monetary policy. After each meeting policy decisions are announced. The main task of the FOMC is to set the monetary stance by fixing the overnight borrowing rate, which essentially sets short-term lending rates in the US. Through this mechanism, the FOMC attempts to affect price levels in order to keep inflation within the target range while maintaining stable economic growth and employment.
The Federal Reserve’s Cash Rate Target decision significantly influences financial markets. Changes in rates affect interest rates for consumer loans, mortgages, bonds, and the exchange rate of the U.S. Dollar. Increases in rates or even expectations of increases tend to cause the Dollar to appreciate, while rate decreases cause the currency to depreciate. Unlike most central banks, the Federal Reserve does not announce an official target inflation rate, arguing independence and flexibility is necessary to implement monetary policy effectively.
The Federal Reserve issues a statement with every rate announcement. Because the decision itself is usually highly anticipated, the wording of the FOMC statement is usually as important if not more important than the actual interest rate move made by the central bank. The FOMC statement contains the Fed’s collective outlook on the economy as well as hints about future monetary policy while the change to interest rates is nothing more than a number. The statement provides clues on plans for the future. When it comes to interest rates, the future direction of rates is usually far more important than its current rate
Ramifications for the U.S. Dollar
Interest rate hike : The US dollar generally rallies on the back of an interest rate hike because the hike increases the yield offered by US assets. This attracts foreign investment into the US which tends to be positive for the dollar. The strength of the reaction will depend on how much the market has already priced in the decision as well as the whether the FOMC statement hints at more rate hikes to come.
Interest rate cut : An interest rate cut tends to be perceived as bearish for the US dollar because the cut reduces the yield offered by US assets. The perception is that the economy has weakened enough that the Federal Reserve is forced to either reduce monetary tightening or increase the stimulus in the market to reignite growth. The strength of the reaction will depend on how much the market has already priced in the decision as well as the whether the FOMC statement hints that more rate cuts are to come.
Rates Left Unchanged : The reaction of the US dollar will depend upon whether the Fed is pausing after a prolonged tightening or easing cycle or has been pausing for some time. If it comes after a tightening cycle, it would be perceived as dollar bearish. If it is after an easing cycle, it would be perceived as dollar bullish. If they have been pausing for months already, the reaction would probably be more neutral.
Relevance: Tends to move markets on release
Release schedule : 2pm (EST); 8 times a year
Source of report : Board of Governors of the Federal Reserve System
Web Address : http://federalreserve.gov/
Address of release : http://federalreserve.gov/fomc/fundsrate.htm
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