Today marks the end of the meeting of the Board of Governors of the Federal Reserve for the month of September. This is the 6th of a scheduled 8 meetings for 2016. At 2:00 today, Janet Yellen will make her statements regarding Monetary Policy. This will be perhaps the most closely monitored speech this year, outside of anything having to do with Novembers election. Over the last several months, every economic statistic that gets released, particularly those related to jobs, inflation and GNP, has gotten scrutinized to determine its impact on the decisions of the Federal Open Market Committee (FOMC), which is the committee in charge of establishing monetary policy.
The Federal Reserve has three tools at its disposal to help smooth the economy. These tools are ‘open market operations’, ‘reserve requirements’ and the Discount Rate. Todays speech will be focusing on the discount rate, which is the rate of interest charged to banks on loans they receive from the Federal Reserve. There are several different lending rates established by the FOMC, one of which is the Federal Funds Rate. The Federal Funds Rate is the rate charged by the Fed for uncollateralized overnight loans which are generally used by the banks to maintain liquidity requirements.
The current Federal Funds Target Rate is 0.25-0.50%. The Federal Funds rate does have some month-to-month fluctuations but is generally within the range targeted by the FOMC. Over the last 60+ years, this rate has been as high as 19.1% back in June of 1981 and as low as 0.07% as recently as January and February of 2014.
As you can see in the chart above, this rate has been at or near zero since the height of the financial crisis back in 2008. There has been much speculation recently that the FOMC would be raising this rate as a sign that the US economy has healed enough increase this rate another 1/4 or 1/2 of a percent, most likely 0.25%. Over the last 2 months, there has been some positive news in several reports, including the 2 most recent labor reports, supporting the idea of increasing this rate. Each time that the speculation points towards this increase, the stock market has a tendency to react negatively but quickly reversing itself.
It’s difficult (at best) to speculate what the announcement will be today, but a lot of FOMC members have indicated that they feel that this is not the right time to raise rates, but we will have to see what happens this afternoon. The one thing that I can say for sure is that at 2:00 there will be a lot of shifting happening that will have both a positive as well as negative impact on many stocks. While I’m not one to give specific advise regarding the market, i will definitely say that if you can’t cope with the price fluctuations associated with this type of volatility, either don’t be in the market today or don’t watch.