FOMC Statement – April 29, 2015

The FOMC has released its latest statement on monetary policy.  It is not really showing its hand in regards to interest rates.  The bigger news of the day was the first quarter GDP coming in at a measly 0.2%.

As I have said before, the obsession with the Fed raising rates is overblown.  It really doesn’t mean as much as the financial media is making it out to be.

Since 2009, as the Fed has dramatically increased the monetary base, the new money has gone into excess reserves in banks.  Therefore, the banks easily meet their reserve requirements and have no need for overnight loans.  This is what the federal funds rate reflects.  It has been under a quarter of a percent because banks don’t need the overnight loans.

The Fed can raise the federal funds rate, but it has no impact on the money supply at this point.  The Fed can inflate, deflate, or keep a stable money policy, as it is doing right now.

In addition, the Fed’s threat of raising the federal funds rate has done nothing to raise market interest rates.  If anything, rates have gone down, despite markets factoring in future Fed rate hikes.

The GDP is the bigger story here.  If the economy is headed into a recession, then new talk will come up about another round of quantitative easing.  That is the real significance.

Until we hear talk about a new QE program, we will watch the stories about Fed interest rates with mild interest.

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