American Fed Policy Rate (FOMC) Explanation
Wall Street was very excited on Wednesday, December 13th local time. The three major American stock indices rose across the board, and the Dow average rose by 500 points or more, breaking record highs. At the same time, both dollar and bond yields fell, and the gold exchange rate also rose 1.3%, breaking through the 2000 dollar mark once again.
What is behind this is “interest rate cuts,” which have been a hot topic recently and are attracting attention. The market reacted greatly to this news, and investors were filled with joy. In this article, I will explain what was announced at the last US Federal Reserve (Fed) FOMC meeting in 2023, which was held at 4:00 a.m. on 12/14 Japan time. Let's explore what made the market so excited and why.
The Federal Reserve suggests interest rate cuts for the first time! Expectations are high in the market!
According to FedWatch, which is based on FF interest rate futures, the market anticipates leaving the policy interest rate unchanged at 5.25-5.50% with a probability of 98% or more. This shows that leaving policy interest rates unchanged is the market consensus. Future interest is shifting to monetary policy (timing and pace of interest rate cuts, etc.) from 2024 onwards.
Factors behind interest rate cuts ①: CPI data in line with market expectations
On December 12, on the day of the FOMC meeting, CPI data, which is an inflation indicator that has been attracting attention, was announced. The CPI for November was up 3.1% from the same month last year, and there was a slight decrease compared to 3.2% in October of the previous month. Core CPI, which excludes highly volatile factors such as food and energy prices, rose 4% from the same month last year. The CPI data was in line with market expectations and was a boost for the Fed to decide to maintain the status quo at the FOMC meeting.
Factors behind interest rate cuts ②: cooling labor market
Although the American labor market has a certain strength in 2023, the creation of new jobs is slowing down, and the rate of employment growth has dropped drastically. This trend can be seen from the three employment-related reports announced in early December.
According to the latest employment dynamics survey (JOLTS) published by the U.S. Department of Labor, the number of job offers in October was actually 8.733 million compared to the expected 9.3 million, which is lower than expected, and it was the lowest level for the first time in two and a half years.
The number of non-farm payrolls employed by ADP in November was 103,000, slightly slower than the previous month. This figure also fell short of expectations, making it the second-smallest increase since January 2021.
The number of people employed in the non-farm sector in November was seasonally adjusted and increased by 199,000, slightly exceeding Dow Jones forecasts. The unemployment rate was also lower than expected, falling to 3.7%.
Two of the three data showed a slowdown in employment, and only one showed a higher than expected increase in employment. However, the market is aware that the American job market is steadily returning to its “pre-COVID pandemic” state compared to the past two years.
Even if the number of non-farm payrolls is lower than expected, the stock market still has optimistic expectations, and investors believe that the Federal Reserve (Fed) will cut interest rates next year.
What is FOMC
FOMC is an abbreviation for the Federal Open Market Committee and is one of the central committees of the Federal Reserve. It is mainly responsible for making monetary policy decisions, and it is held about 8 times a year. Seven directors elected from within the Federal Reserve and 12 district bank governors participate in the FOMC. FOMC analyzes economic indicators such as economic growth and inflation rates, and determines monetary policies such as interest rate hikes, interest rate cuts, and quantitative easing policies.
The difference between the FRB and the FOMC
The FOMC and the Federal Reserve are institutions related to the Federal Reserve System (Federal Reserve System), which is the central bank of the United States of America, but they have different roles. The Federal Reserve is the central bank of the United States of America and has a wide range of roles. Meanwhile, the FOMC is one of the central committees of the Federal Reserve and is mainly responsible for making monetary policy decisions.
Statements issued at FOMC have an optimistic impact on the market
As expected, at its final meeting in 2023, the Fed chose to leave interest rates unchanged at a 22-year high. As a result, key interest rates will remain unchanged for the third time in a row this year.
After the meeting, the Federal Reserve Chairman said that it was very good news that there was no drop in inflation and a sharp rise in unemployment. In response to questions about interest rate cuts, the winners have not yet been decided, and they stated that it was too early, but at least officials acknowledged that they were discussing interest rate cuts.
In short, this is the first time that Federal Reserve Chairman Powell mentioned that they are discussing interest rate cuts, and the market is taking this as an optimistic and positive signal.
Also, the Fed announced the 2024 economic forecast report at the same time as the statement, but what the market is concerned about is that, as indicated by Dot Plot, all Fed officials have determined that the strongest and fastest interest rate hike cycle has come to an end.
Dot plot brought big news to the market. According to Dot Plot, most members of the Federal Reserve are planning to cut interest rates three times next year. This will be a peace of mind for investors who are expecting interest rate cuts.
The timing of interest rate cuts is a new dilemma
There are various reasons why the Fed cuts interest rates. One is that the unemployment rate rose dramatically during the recession, and the other is that the inflation rate returned to 2%, which is the Fed's target. This is because if interest rates are not cut, once the above two scenarios are established, the economy will be dragged by rising interest rates and low inflation.
Chairman Powell stated in response to the interest rate cut standard that the Fed wants to lower the inflation rate to 2%, but it is too late to wait for interest rate cuts until the inflation rate is really 2%. The PCE Price Index (PCE Price Index), which is the Fed's favorite inflation indicator, is expected to drop from 2.8% in 2023 to 2.4% in 2024. Vanguard analysts believe that the last mile to 2% is the most difficult, and they are watching future inflation data trends.
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