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What Is the FOMC Policy Statement? How Is It Used & Interpreted?

At the end of each FOMC meeting, the Fed releases a short statement outlining its current take on the state of the economy.
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The whole world awaits the latest statement from the Fed

What Is the Fed? What Does It Do?

The Federal Reserve, also known as the Fed, is the central bank of the United States. It is in charge of setting sound monetary policies which keep employment high and the economy strong.

What Happens at FOMC Meetings?

About every six weeks, its Federal Open Market Committee (FOMC) meets privately to discuss the latest economic data, developments in financial markets and any steps it plans to take.

Participation ranges from the Fed Chair to its Board of Governors to the presidents of the country’s 12 federal reserve banks, although only the 12 FOMC members currently elected can actually vote on Fed policy.

Because the FOMC meetings are not public, a lot of buzz builds in anticipation over what could happen. The Fed’s official meeting minutes are not released until three weeks after its FOMC meetings, but starting in the year 2000, the Fed began issuing a policy statement on the final day of the FOMC meeting in order to increase transparency.

What Does the Fed Say in Its FOMC Policy Statement?

The Fed has several tools at its disposal to regulate the economy. If it needs to loosen the monetary supply, it buys Treasury securities and thus increases market liquidity, making it easier for consumers to do things like take out mortgages and car loans.

If the Fed wants to control inflation, it tries to tighten the monetary supply. It does this by raising the fed funds rate, which is the overnight rate banks use to lend to each other. This translates down to consumers in the form of higher prime interest rates.

The FOMC policy statement briefly outlines its current take on the state of the economy and what it is doing in the immediate term. It also provides forward-looking guidance through the end of the year.

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TheStreet Dictionary Terms

Therefore, the FOMC policy statement is a short statement made after each of the FOMC meetings, announcing any changes in monetary policy and assessing the risks the economy is facing.

How Does Fed Control Risk? What Information Might It Give in Its Statement as an Indication?

The Fed is always working toward the long-term goals of price stability and sustainable economic growth. But if interest rates are too high, economic growth may slow, creating outcomes like shrinking payrolls and rising unemployment. On the other hand, if interest rates are too low, growth may outpace the economy's potential, leading to shortages and rising inflation. The FOMC aims to foster an ideal economic environment by setting interest rates at the right level at the right time.

Therefore, its policy statement may provide one of the following assessments:

  1. Current risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.
  2. Current risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.
  3. Current risks are balanced with respect to prospects for both goals in the foreseeable future.

The first option puts the markets on notice that the FOMC may see the need to ease monetary policy by lowering interest rates down the road. The second basically says it may see the need to tighten policy by increasing interest rates. And the third indicates that the committee anticipates leaving rates where they are.

When Did the Fed Start Releasing Policy Statements?

Prior to February 2000, the FOMC only released a statement after meetings when it either changed monetary policy or significantly altered its outlook. And rather than stating its view in terms of the balance of risks to the economy, it stated things vaguely, in terms of its monetary policy "directive." This directive would contain a bias toward tightening monetary policy, a bias toward easing monetary policy, or no bias at all.

The FOMC changed its practice because the bias language had become inconsistent with how monetary policy is conducted. The bias language dated from a time when it was not unusual for the committee to make monetary policy moves between scheduled meetings. The bias (or absence thereof) applied specifically to "the intermeeting period," which was pretty confusing to understand.

As intermeeting policy moves became the rare exception, a bias covering the intermeeting period no longer made sense. The FOMC actually briefly experimented by providing no statement, but even it admitted this practice only added to uncertainties. Using its own jargon, it stated that doing so "may have intensified the public focus on the chance of a subsequent adjustment to the stance of policy, thereby increasing the possibility of misperceptions about the odds and timing of policy action."

Therefore, in January 2000, the committee announced its new policy of stating its view in terms of the balance of risks. Financial markets rejoiced over this step to increase transparency and thus shine more light on what might lie ahead for the economy.

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