Report on Minutes of the Federal Open Market Committee January 26–27, 2021.

Explain their decision about interest rates, and why they came to this decision; the impact their decision might have on the bond market, the stock market, and the economy in general.
A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, January 26, 2021, at 1:00 p.m. and continued on Wednesday, January 27, 2021, at 9:00 a.m.

Introduction.

The Federal Open Market Committee (FOMC) works within the Federal Reserve System. This Federal Reserve committee can make key decisions about interest rates for the United States money supply. FOMC is charged under United States law; further, it oversees the nation’s open market operations, such as the Fed’s buying and selling of the United States. Times ago, each of the Federal Reserve banks was authorized to buy and sell on the open market bonds. So, the reserve banks were at times bidding against each other in the open market. To execute the purchases and sales, an informal committee was established in 1922. The Banking Act of 1933 formed an official FOMC. Now the Federal Open Market Committee is the principal organ of monetary policy. It is a fact that the changes in the federal funds rate trigger a chain of events. Add to this, these events affect other short-term interest rates, long-term interest rates, and foreign exchange rates. It also affects the amount of money and a range of economic variables, such as employment, output, and prices of goods and services. (“The Fed – Federal Open Market Committee”)

Discussion.

Finding: Decision of FOMC about Interest Rate.

The Federal Reserve announced that it’s keeping interest rates steady following its Jan. 26-27 meeting, leaving the federal funds rate at a range of 0 to 0.25 percent. This follows the Fed’s decision to hold rates near zero until the economy has weathered the effects of the coronavirus.

Many experts widely expected this decision to leave rates alone. It seems a consequence of the U.S. joblessness on the coronavirus crisis over the past year. According to Fed chair Jerome “highly accommodative monetary policy will continue at extraordinary levels for the foreseeable future”.

Expected consequences.

One of the most important responsibilities of the Fed is setting the federal funds target rate, which is the interest rate banks charge each other for overnight loans. The federal funds’ target rate serves as a benchmark for many short-term interest rates, such as rates used for savings accounts, money market accounts, and short-term bonds. The target rate also serves as a basis for the prime rate. Through the FOMC, the Fed uses federal funds’ target rates as a means to influence economic growth.

To stimulate the economy, the Fed lowers the target rate. If interest rates are low, the presumption is that consumers can borrow more and, consequently, spend more. For instance, lower interest rates on car loans, home mortgages, and credit cards make them more accessible to consumers. Lower interest rates often weaken the value of the dollar compared to other currencies. A weaker dollar means some foreign goods are costlier, so consumers will tend to buy American-made goods. Increased demand for goods and services often increases employment and wages. This is essentially the course the FOMC took following the 2008 financial crisis in an attempt to spur the economy. (“Who Determines Interest Rates?”)

On the other hand, if consumer prices are rising too quickly (inflation), the Fed raises the target rate, making money more costly to borrow. Since loans are harder to get and more expensive, consumers and businesses are less likely to borrow, which slows economic growth and reels inflation.

People often look to the Fed for clues on which way interest rates are headed and for the Fed’s economic analysis and forecasting. Members of the Federal Reserve regularly conduct economic research, give speeches, and testify about inflation and unemployment, which can provide insight into where the economy might be headed. All of this information can be useful for consumers when making borrowing and investing decisions. (“How Does The Federal Reserve Affect The Economy? – Barnum Financial Group”)

Debate by the members in the Minutes of the Federal Open Market Committee January 26–27, 2021
The manager turned first to a discussion of financial market developments. Progress on vaccinations had been slower than expected, and the near-term trajectory of the pandemic worsened, weighing on economic activity. However, even with the appearance of new strains of the virus, market confidence in the ultimate efficacy of the vaccination efforts seemed to remain high. In the Open Market Desk Survey of Primary Dealers, the median 2021 gross domestic product (GDP) growth forecast rose about 1 percentage point.

Expectations for the path of the target federal funds rate over the next several years, as implied by interest rate futures and by the Desk Survey of Primary Dealers and Survey of Market Participants, were relatively little changed from December. The stability in near-term policy rate expectations amid an improving growth outlook appeared consistent with the Committee’s new framework and forward interest rate guidance. Although the median Desk survey respondent continued to expect 12-month personal consumption expenditure (PCE) inflation of 2.3 percent when the FOMC first lifts the target range, the median expectation for the unemployment rate prevailing at that time was modestly lower than in December. (“The Fed – Federal Open Market Committee”)

The next move may be, in my opinion:

  1. In my opinion, interest rates are expected to continue their upward march. However, for now, they’re not expected to get high enough to harpoon the stock market.
  2. As we have seen that Treasury yields have been raised quickly and the benchmark 10-year yield has been on a tear – reaching 1.33% before retreating below 1.30% in a few days.
  3. Statics shows that the Yields move opposite price and the 10-year has risen from about 1.15% to levels that are close to where they were when the pandemic started hitting the economy in the last year.
  4. The 10-year is key to the economy since it impacts mortgages and other consumer and business loans.

Report by x.y.z 3 March 2021.

REFERENCE PAGE:
Financial Markets and Institutions, 13 th Ed., by Jeff Madura.
“The Fed – Federal Open Market Committee”. Board Of Governors Of The Federal Reserve System, 2021, https://www.federalreserve.gov/monetarypolicy/fomc.htm.
“Who Determines Interest Rates?”. Investopedia, 2021, https://www.investopedia.com/ask/answers/who-determines-interest-rates/.
“How Does The Federal Reserve Affect The Economy? – Barnum Financial Group”. Barnum Financial Group, 2021, https://barnumfinancialgroup.com/how-does-the-federal-reserve-affect-the-economy/.
Lanman, Scott; Runningen, Roger (December 27, 2011). “Obama to Choose Powell, Stein for Fed Board”. Bloomberg LP. Retrieved December 27, 2011

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