Anyone hoping for a major surprise from the January Federal Open Market Committee (FOMC) meeting is likely to be disappointed. As was widely expected heading into the gathering, the FOMC decided to hold interest rates steady — for now. The target range for the benchmark federal funds rate remains at 1.5%-1.75% (at least for the next month and a half or so).
The main reason for the interest rate decision, according to the FOMC statement, appears to be inflation. Specifically, the FOMC has set an objective to reach a 2% inflation rate, and the actual number has been running short of that. The statement said that the committee’s policy is intended to produce “inflation returning to the Committee’s symmetric 2 percent objective.”
A couple of changes in the FOMC statement
There are few documents in the world that are as dissected on a word-for-word level as the statement the FOMC releases after each meeting, so let’s take a closer look at the two major changes in the January edition.
I already mentioned the line about inflation, and this was one of the more significant changes to the closely watched FOMC statement. Specifically, the phrase “returning to” 2% inflation replaced “near” 2% inflation in the December statement, indicating that the Fed might act more aggressively in the future to help push inflation higher.
The other notable change in the statement is that the FOMC now sees household spending rising at a “moderate” pace, where it previously saw “strong” spending growth.
Both of these developments can be interpreted as positive changes for the stock market. They indicate that there’s more of a probability that the FOMC might cut rates in the future and less of a probability for rate hikes, which many had feared would come in the wake of the generally strong U.S. economy.
Why are stocks higher after the FOMC decision?
Typically, a pop in the stock market happens when the FOMC decides to cut interest rates. However, stocks rose sharply after the decision to hold rates steady was announced.
The reason is that prior to the decision, investors were considering two main possibilities. According to CME Group‘s FedWatch tool, heading into the two-day meeting, the market was pricing in an 87% chance that the committee would hold rates steady and a 13% chance of an interest rate hike. In other words, another interest rate cut was never considered to be a serious possibility.
So of the two realistic possible outcomes, the Fed gave investors the more positive one (for the market). That’s why we’re seeing the stock market rise after the decision was announced.
It’s worth noting that the Fed decision and statement aren’t the only potentially market-moving events to come out of the meeting. Chair Jerome Powell’s press conference always has the ability to surprise investors as well.
The next FOMC meeting will be held in March, and unlike the January meeting, March’s decision will be accompanied by the Fed’s latest economic projections and its dot plot, which will give us a better idea of where members see interest rates heading for the rest of 2020 and beyond.
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