The US central bank celebrates its 110th birthday this year. In the Federal Reserve Act of 1913, the USA transferred responsibility for monetary policy to the “Fed”. At the heart of this powerful institution is the Federal Open Market Committee, or FOMC. The body has twelve members. The chairman of the Federal Reserve Bank of New York has a permanent seat alongside the seven members of the Fed Board. The other four seats are taken by bosses of the eleven other regional US central banks, who occupy them in annual rotation. The FOMC assembles eight times a year for regular meetings, spending two full days discussing the economic and financial conditions. This then forms the basis for the FOMC’s monetary policy decision. The next meeting will begin around a large, oval conference table in the Fed’s Washington headquarters on 14 June.
The US central bankers are required to remain silent for ten days beforehand, with the blackout period starting on 4 June. From this date up to and including 16 June, the FOMC members must not offer any public statements. It goes without saying that this does not apply for the media conference given by Fed chairman Jerome Powell after the end of the meeting or the publication of the official Fed statement. Hardly surprisingly, comments by the US monetary authorities in the weeks prior to the blackout are scrutinised particularly closely by the capital markets. This is all the more so at the moment, given that the FOMC has turned the interest rate screw aggressively in recent months: the committee put the base rate (Federal Funds Rate) up ten times in a row since March 2022, raising it from almost zero to the current range of 5.00% to 5.25%.
A glance at the Federal Funds Effective Rate (see graph) makes clear the historic dimension of the latest turnaround in interest rates in the USA. This is the rate at which banks trade their Fed deposits overnight. The central bank itself influences the effective rate by conducting transactions on the open market in order to get as close as possible to its target range. Following the interest rate decision at the start of May, the Federal Funds Effective Rate climbed above the significant 5% mark for the first time in almost 16 years. If futures markets are right, the FOMC will leave things there at least for the time being – they do not expect to see another hike in rates in June. According to the CME FedWatch Tool, the likelihood of this scenario is more than 80%. This highly regarded information tool even puts a first cut in interest rates in the autumn within the realms of possibility. However, opinions in this regard still differ quite widely.
Doubts about the interest rate pause or turnaround have been sown not least by leading US currency watchdogs. These included Austan Goolsbee, also a member of the FOMC. The boss of the Chicago Fed affirmed the central bank’s determination to dampen inflation. In his view, it is “way too early to discuss interest rate cuts”. Such assessments naturally met with little enthusiasm on equity markets. In contrast, the fixed-income investment sector has something to offer again after years of austerity, with even short-dated USD time deposits offering respectable returns once more. Nevertheless, the conditions here are heavily dependent on the terms: liquid short-term availability clearly comes at the cost of income. Leonteq is providing a link to the official money market rates in the USA with a specially designed index. The Leonteq USD Overnight Return Index collects the overnight rate, making the flexible management of USD cash holdings possible.
Source: St. Louis Fed (FRED Economic Data), Reuters; as at: May 2023 Past performance is not a reliable indicator of future performance.