Federal Funds Rate: The Decision is In

Just in case you missed it, the Federal Open Market Committee, or FOMC, concluded their most recent round of meetings on Wednesday, July 31, which affects the Federal Funds Rate (fed funds rate). The FOMC meets every six weeks to discuss monetary policy, current and future economic conditions and the cost of funds. While the Fed doesn’t directly affect rates that consumers use, with the exception of anything tied to the Wall Street Journal Prime Rate, it does give mortgage companies guidance as to what the economy will look like down the road.

How it Works

The Fed can adjust the Federal Funds rate up, down or simply leave it alone. When the Fed makes a move up, it’s because the general feeling is the economy is not only on solid footing but there doesn’t appear to be any inflationary forces as well. Conversely, lowering the Federal Funds rate indicates the economy probably needs a little boost.

The Federal Funds rate is the rate banks can charge one another for very short term loans. At the end of each business day, banks must meet certain reserve requirements to make sure there are enough funds available to meet consumer cash demands. Think checking and savings account. If there appears to be a shortage, banks charge one another short term, overnight rates for the privilege of borrowing money to meet reserves. These two day meetings are wrapped up on the second day with an announcement of the Fed Decision at 11:00 PST. This process does not change.

What is certainly worth noting is the initial announcement was pushed back to 11:30 PST. What does that tell? It tells me the Fed Board Governors had quite the discussion and the decision was made after much more deliberation than normal.

The fact is the economy is doing well and while there may be some indications of a slowdown there also doesn’t appear to be any inflation involved. What’s also remarkable is the fact there have been no rate cuts in nearly a decade. That’s almost a record. Instead, the economy has been on a steady-as-she-goes track with a gradually growing economy. Stocks have risen over time but not alarmingly so. It’s simply been a steady march and this is good news for the Federal Funds rate.

Federal Funds Rate Lowered

The Fed announced the Federal Funds rate was lowered to 2.00 percent from 2.25 percent. Mention was also made that much of the information considered during this latest round was not just the economy in the United States, but also a general slowdown in the global economy.

The announcement also made note that while the economy has been growing, the growth has slowed according to the most recent GDP numbers. The committee also mentioned during the June meetings that lowering rates was necessary based upon recent economic data having reported a slowdown but wanted to wait another month to confirm the data. July’s data essentially confirmed the June meeting’s thinking.

Finally

There appears to be no signs of inflation, especially at the core level. Core level inflation excludes price changes in the sometimes volatile food and energy sectors. It’s also not likely, but of course possible, there will be no more Federal Funds rate changes through the rest of 2019. That can always change as the Fed did say they will monitor the economy and make any additional moves as needed.