FOMC Meeting today

The FOMC is expected to announce no change in the 0.25% target rate today.  They may acknowledge that the economy continues to be on a recovery path citing the higher Retail Sales and employment despite the harsh weather.  Given the still high unemployment and the unwinding of stimulus measures they are likely to keep the rates steady for an “extended period of time”, but one has to wonder if they will define further the word “extended” at some point.  The Fed needs to be careful to not paint themselves in the corner by keeping extended as part of the language for too long. 

The Fed normally does not raise rates until NFP is adding on average 225k-250K for a three month period.  This suggests the tightening is not any time soon. However, counter to that is rates are at 0.25% which are historically at record low levels. As a result, when accomodation starts to get unwound, moving to 1% continues to keep rates accomodative (at 0.25% rates are historically very accomodative).

An action that they may look to do is possibly raise the discount rate by 25 basis points in the attempt to take further abnormality out of the market. On February 18th the Fed raised the rate to 0.75% and the spread to the target Fed Funds rate rose to  0.5%. That was the spread that existed from August 2007 to February 2008. Prior to that the spread was “normally” at 1.0%. 

On Feb 18th the Fed commented:

“Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point”

The Fed later lowered the spread to 0.25% where it stood until February 18th. 

The Fed added on that date that:

“The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread“.

The Fed has left the door open to a more normal spread of 1%.  As a result, the Fed may choose to move a step closer to 1% by raising the rate to 0.75%.

The last time the Fed did raise the dollar rose on the news (see the chart below).  A similar move would be th expected initial reaction.