Be Prepared for the Release of the FOMC Statement

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Here’s How to Read an FOMC Statement

By Laura Hopper, Public Affairs Staff

For non-economists, this might seem like textbook jargon:

  • sustained expansion of economic activity
  • inflation near the Committee’s symmetric 2 percent objective
  • timing and size of future adjustments to the target range for the federal funds rate

Summarized in the context of who’s saying them, though, these words can move mountains—or at least markets.

Meet the Federal Open Market Committee (FOMC)

Image courtesy of Federal Reserve

Federal Open Market Committee (FOMC) participants gather at the Marriner S. Eccles Building in Washington, D.C., for a two-day meeting held Jan. 29-30, 2020.

The phrases above come from statements issued after meetings of the Federal Open Market Committee, known more commonly as the FOMC. The FOMC is the primary monetary policymaking body of our nation’s central bank, the Federal Reserve.

The Fed has a mandate from Congress to promote the macroeconomic objectives of maximum sustainable employment and stable prices, and the FOMC is firmly committed to fulfilling this statutory mandate.

The FOMC typically meets eight times a year in Washington, D.C. The actions announced after each meeting have a ripple effect. Broadly, the FOMC can influence the supply of money in the economy, as well as influence interest rates in markets. These decisions can then affect the availability of credit and the level of interest rates paid by businesses and consumers.

It’s no wonder, then, that investors and consumers alike stop and listen when FOMC actions are announced. Or that the FOMC’s actions are what come to mind when the Fed comes up in general conversation: Did they decide to raise rates? How is the stock market reacting?

From “Fedspeak” to Transparency

“If I turn out to be particularly clear, you’ve probably misunderstood what I said.” – Former Fed Chair Alan Greenspan in a 1988 speech, early in his Fed tenure, as quoted in the New York Times.

Statements like this led to a term popular in economic circles: Fedspeak. Many analysts speculated that Greenspan intentionally kept his statements vague to avoid overreaction by markets or private investors. That approach evolved in the early 2000s, as being more transparent to the public became a growing priority for the FOMC and the Fed in general.

  • Starting in December 2004, FOMC meeting minutes were released faster.
  • In April 2020, then-Fed Chairman Ben Bernanke began the practice of holding a post-meeting news conference four times a year.
  • In 2020, current Fed Chairman Jerome Powell holds a news conference after every FOMC meeting.

The Structure of an FOMC Statement

And then there are the FOMC statements themselves. Until early 1994, the Fed did not issue a statement after an FOMC meeting. The first statement appeared in 1994, just four sentences, focused only on the Fed’s decision to change the federal funds target interest rate.

Subsequent statements grew to several (albeit brief) paragraphs that also included a description of the state of the economy and the rationale for the FOMC’s policy action. In January 2000, the FOMC announced it would issue a statement after each regular meeting, even if there was no change in policy.

Although forecasting the economy is a complex undertaking, modern FOMC statements follow a simple structure with distinct parts. The next time an FOMC statement is released, show off your knowledge to family and friends by following this guide to understanding its words.

FOMC Statements at a Glance
You don’t have to be an economist to understand the FOMC’s communications.
Key Features What They Contain
Feature 1 Recent economic developments: What has happened since the last meeting?
Feature 2 Monetary policy goals: Focused on the Fed’s dual mandate of maximum sustainable employment and price stability.
Feature 3 Policy decision: What decision was made at the meeting?
Feature 4 Forward guidance: Communication about the likely future course of monetary policy.
Feature 5 The decision process: Factors the FOMC plans to consider in upcoming policy decisions.
Feature 6 Voting record: Who voted and how?

For purposes of illustration only, examples below were taken from the first FOMC statement of 2020, issued on Jan. 30. You can always find the most recent statements at the Board of Governors website.

Feature 1: Recent Economic Developments

The first feature of an FOMC statement sets the stage by summarizing the state of the current U.S. economy since the previous meeting. The focus is typically on employment and inflation, given the Fed’s dual mandate of maximum employment and price stability.

Example, Jan. 30, 2020: “Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. … On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. …”

Feature 2: Monetary Policy Goals

After the brief discussion of recent developments, the Fed’s dual goals are then highlighted. Recently, this statement has read as follows: “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.”

Feature 3: The Policy Decision

If you’re a speed-reader who prefers to get to the point, then this is your best bet. The FOMC’s policy decision is stated here. A sentence announcing the actual decision may stand alone or be followed by another sentence highlighting the FOMC’s current monetary policy “stance” (i.e., accommodative, restrictive, etc.).

Example, Jan. 30, 2020: “In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.”

Feature 4: Forward Guidance

The fourth feature, in a more explicit nod to markets, is what type of action (i.e., raise, lower, or leave rates unchanged) the FOMC is leaning toward taking regarding the federal funds rate in the months ahead. This communication about future monetary policy is known as forward guidance. When central banks like the Fed provide forward guidance, individuals and businesses can use this information in making decisions about spending and investments. FOMC statements in early 2020 have stressed that “the Committee will be patient.”

Example, Jan. 30, 2020: “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

Feature 5: The Decision Process

The fifth feature includes what factors the FOMC plans to consider in upcoming policy decisions.

Example, Jan. 30, 2020: “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

Feature 6: The Voting Record

Last but not least, after the previous paragraphs spell out the what, why and how, the last feature of an FOMC statement reveals the who. Sometimes there is unanimity on the decision. But it isn’t always unanimous, and FOMC members may dissent (choosing to vote opposite the majority).

Example, Jan. 30, 2020: “Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.”

Additional Resources

You can learn more about dissents—and dive deeper into all things FOMC—by visiting the St. Louis Fed’s FOMC Speak, a repository of speeches, interviews, testimony and commentary by Federal Open Market Committee participants.

Laura Hopper is the St. Louis Fed’s employee ambassador coordinator. She works in Public Affairs.

The Rising Complexity of the FOMC Statement

Do you want to read the rest of this article?

Everything About FOMC Meetings Changed In 1994 When Fed Members Realized They Were Terrible Speakers

Even the statements and minutes of its Federal Open Market Committee (FOMC) meetings rarely tell the whole story of what the Fed officials are really thinking.

Indeed, to better understand the Fed, you need to follow the countless numbers of speaking engagements and interviews that the Fed members make in between the FOMC meetings.

Vincent Reinhart, Morgan Stanley’s Chief U.S. economist, explains why this is so in a new note to clients. Few people have a better understanding of how the Federal Reserve works than Reinhart, a former Fed insider.

The Fed’s failure to communicate internally owes to an irony of increased openness. In 1994, under considerable Congressional pressure, the Fed became more transparent. One initiative was for historians. The FOMC decided to release lightly edited, but otherwise complete, transcripts of every meeting, five years after the fact. 1

What followed was a predictable social dynamic that is never factored in by economists in their theoretical reasoning that more transparency is better. Starting that year, speakers at an FOMC meeting were given a rough draft of their remarks a few weeks after each meeting. Most learned, to their surprise, that they were a lot less lucid speakers than they had imagined. Off-the-cuff responses to prior speakers looked unthoughtful in black and white. Almost immediately, some began bringing prepared remarks. This set off a readiness race that ended with virtually everyone reading from prepared texts.

Meetings got longer and less spontaneous. More problematic still, meetings became a less useful way of exchanging information and changing minds. This led to a new dynamic: When policy views are scripted, the window to influence views opens before the meeting, when scripts are being written, not during the meeting, when scripts are being read. Thus, Fed officials give more speeches and interviews before meetings to signal each other what they will read at the meeting. If a policy issue is contentious—if it is a close call—then the volume cranks up. It just so happens that the free investing world is listening to that conversation.

Indeed, some weird but often humorous stuff comes up in those transcripts. In January, the Fed released the transcripts of the 2006 FOMC meetings and they were much more entertaining than you would expect.

FOMC Minutes Preview: Is The “Symmetric” Fed About To Become Less “Accommodative”?

Today at 2pm EDT, the Fed will release the minutes from the FOMC meeting held on May 1/2 in which it held rates but tweaked its guidance on inflation.

While comments on the natural rate and the yield curve will be of particular focus, Bloomberg notes that per John Williams, the Fed’s era of pledging easy monetary policy may be coming to an end, and today’s minutes could reveal if Williams’ colleagues agree. Meanwhile, as RanSquawk adds, while the release isn’t expected to be a major market mover, it may have a hawkish tilt.

Some other observations on what to expect, courtesy of RanSquawk:

RATES: At the FOMC’s May meeting. the central bank kept rates unchanged at 1.50-1.75%, as expected. The Fed has already hiked once in 2020; in its March economic projections, it pencilled in three rate rises in 2020, and money markets are pricing this trajectory with over 90% certainty; there are also risks of a fourth hike, which markets are assigning a probability of just over 50%.

MAY STATEMENT: The statement, however, saw a few crucial tweaks. The Fed now characterises inflation as “moved close” to 2% (previously it was described as “continued to run below 2%”), and additionally, it added word “symmetric” with regards to its inflation target, which traders eventually interpreted as the idea that the Fed would be prepared to allow an overshoot of inflation without taking aggressive action to rein in price pressures.

“The Fed was much gentler with their inflation tweaks than they could have been in the May statement. This is part and parcel of not wanting the market to read too much into changes that are coming at a non-press conference meeting (i.e. Chairman Powell is not there to talk market participants off the ledge),” RBC writes, “but with that said, the mark-to-market on inflation continues to trend up.”

Fed officials themselves seem to be more tolerant of temporarily higher inflation, with the outgoing NY Fed President Dudley (voter) arguing that an overshoot would not be an issue; even the more dovish contingent, like Bostic (voter) have acknowledged that inflation will likely be above 2% for a while. Fed’s Harker (a non-voter, and representative of the middle ground on the Fed) has endorsed three hikes in 2020, though says he would favour a fourth if inflation runs away (though he does not see that happening just yet), and even the hawkish Mester (voter) does not expect inflation to pick-up sharply, and endorses a gradual rate hike path.

NATURAL RATE OF INTEREST: Analysts will also be watching for discussion on the neutral rate, which most FOMC participants have been reticent to revise upwards in their forecasts (a recent paper by the Fed’s Williams suggests that the natural interest rate is lower than in history, largely on the back of demographics, sluggish productivity, and the demand for safe assets). Williams himself (voter, and incoming NY Fed President) has suggested that the Fed may need to overshoot the rate, which some have noted is typical in hiking cycles. “The market currently has the Fed stopping near the lower end of neutral estimates (which is about 2.5% on Fed Funds),” RBC adds, “we think a re-pricing to a steeper tightening path will continue to play out in the months ahead.”

YIELD CURVE: There will also be focus on the Fed’s comments on the yield curve, a subject that has featured heavily within Fedspeak recently, though the FOMC’s thinking has been mixed. Fed’s Bostic (voter) and Bullard (non-voter) have warned that inversion is a scenario that the Fed should prevent given it has historically portended a recession ahead, with the latter suggesting an easier pace of rate hikes to avoid the scenario. The Fed’s Williams, meanwhile, seems more unconcerned, suggesting it is a situation to monitor over the next couple of years, as the signals shouldn’t be ignored as the Fed is lifting rates.

THE UN-ACCOMODATIVE FED? The biggest surprise would be if the Fed stops pledging an era of easy, accommodative policy. As BBG notes, Williams – the incoming New York Fed president – told Bloomberg in an interview last week that it might make sense to stop pledging “accommodative” policy and a prolonged period of low rates, echoing a debate that surfaced in minutes of policy maker’s meeting in March. As a result, Michael Feroli, the chief U.S. economist at JPMorgan, would “not be surprised” to see some warning in the May minutes if a wording change is coming in June.

Below, as Bloomberg’s Jeanna Smialek notes, are the statement sentences that may be up for review:

“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”

“. the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Any update would reflect that rates have moved from near zero toward more normal levels. But it’s not clear what level represents a neutral rate of interest – a setting where policy neither fosters nor slows growth – adding confusion to the discussion of how and when to amend the language.

In short: these could be the first FOMC minutes in a while which have an outside market reaction, and with the Fed potentially set to remove the market’s training wheels, stocks may not like it.

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