The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members–the seven members of the Board of Governors and five of the 12 Reserve Bank presidents. On March 16-17, 2021, the FOMC held one of their eight regularly scheduled meetings, and the decision of the committee was heavily anticipated by investors. The FOMC uses these meetings to establish short-term monetary policy based on the current financial and economic landscape. The goal of these policies is to1:
- Reach maximum employment
- Control inflation or keep prices stable
- Moderate long-term interest rates
The primary strategy the FOMC uses to achieve these long-term goals is to adjust the target range for the federal funds rate. If the committee lowers the target range, it will lower the cost of home mortgages and loans. This will increase the number of loans taken out and increase economic activity and vice versa if the range is raised. If the range is lowered it can be viewed as expansionary (dovish policy) and raising the range can be viewed as contractionary (hawkish policy). The chart below shows the history of the Federal Funds Rate target.
After the conclusion of the most recent meeting, the FOMC decided to keep the Federal Funds Rate range between 0% and 0.25%, which is where it has been since the emergency meeting in March of 2020. Additionally, the committee raised their forecast for real GDP and lowered their forecast for unemployment. The Fed Funds rate decision was viewed as dovish policy and coupled with the forecasts of higher GDP growth and lower unemployment was well received by investors and the market. The decisions can be seen in table below2.
However, as the 10yr U.S. Treasury yields climb higher, concerns over inflation continue to weigh on the positivity of the FOMC meeting. The committee targets 2% inflation because it fosters price stability for the economy, however, the current 10yr breakeven inflation rate is 2.31% and has been steadily rising as seen in the chart below3. If the rising momentum in inflation continues, the FOMC is faced with a difficult decision of either letting inflation go unchecked (this can be bad for the economy) or raise the Federal Funds rate, which could be viewed as a contractionary signal and have a negative impact on the markets.
Although inflation remains a concern, the key takeaway from the FOMC meeting was that the economic turnaround remains intact with expectations of strong GDP growth and a return to max employment; supported by a low fed funds rate. It is important to understand the impacts FOMC decisions can have on investors, which is why it is crucial to reassess risk and rebalance periodically. At Gradient, we believe current forecasts of economic conditions are favorable for stocks in the near term.