The Fed Open Market Committee (FOMC) which sets US monetary policy convened in Washington this morning for its last meeting of 2015. It is widely expected that the Committee will vote to hike the key Fed Funds rate for the first time in almost a decade before the meeting concludes tomorrow.
The FOMC slashed the Fed Funds rate from 5.25% in late 2007 to near zero by late 2008 during the financial crisis and recession. It has kept the key lending rate at 0.00% to 0.25% ever since in an effort to stimulate the economy, in addition to buying an unprecedented $3.7 trillion in Treasuries and mortgage-backed securities in a process known as “quantitative easing" or QE.
It is not entirely certain that the FOMC will hike the Fed Funds rate tomorrow, but that is the prevailing consensus. Based on the minutes from the last FOMC meeting in late October, which were released on November 18, it is clear that Fed Chair Janet Yellen has a majority of FOMC voting members ready to support a rate hike if she chooses to do so.
It is also not entirely clear how much the Committee might raise the Fed Funds rate should it decide to enact “lift-off” tomorrow. The prevailing consensus is that the first rate hike would be only 25 basis points (0.25%), but the Fed has provided very limited guidance as to the size of the expected increase. Assuming the rate hike is only 25 bips, the other question is from where – the Fed Funds rate is currently just under 0.15%.
There are strong arguments on both sides of the lift-off issue. Many believe the Fed has already waited way too long to start normalizing interest rates and are adamant that lift-off should begin tomorrow. Many others, however, believe that the economic recovery is still too weak and the Fed should delay lift-off until sometime next year at the earliest.
It is these two arguments that we will discuss today, ahead of tomorrow’s key decision. But before we get to that discussion, let’s do a quick review of the makeup of the Fed Open Market Committee, the most powerful monetary policy body in the world.