What Is the FOMC Policy Statement? - TheStreet Definition

Dictionary of Financial Terms

The Federal Open Market Committee releases a short statement after each of its meetings, announcing any change in monetary policy and assessing the risks the economy is facing.

There are two main risks an economy can face: Slowing growth and rising inflation. If interest rates are too high, growth may slow too much, shrinking payrolls and causing general misery. If interest rates are too low, growth may outpace the economy's potential, leading to shortages and rising inflation. The FOMC aims to steer a course between these two shoals by setting interest rates at just the right level.

To indicate which set of circumstances it considers the greater threat, the FOMC opts for one of three possible assessments:

1. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes that the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

2. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes that the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

3. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes that the 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 the fed funds rate down the road. The second puts them on notice that it may see the need to tighten policy by hiking the rate. And the third indicates that the committee anticipates leaving the rate where it is.

Prior to February 2000, the FOMC's practice was different. It released a statement only after meetings at which it either changed monetary policy or significantly changed its outlook. And rather than stating its view in terms of the balance of risks to the economy, it stated it in terms of its monetary policy "directive." The 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 the absence of a bias) applied specifically to "the intermeeting period."

As intermeeting policy moves became the rare exception, a bias covering the intermeeting period no longer made sense. The FOMC briefly experimented with leaving the period covered by the bias (or lack thereof) undefined, but concluded 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." So in January 2000, the committee announced its new policy of stating its view in terms of the balance of risks.

Definitions of Financial Terms