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The Federal Reserve continues to be patient

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Updated

FOMC statement

The FOMC (Federal Open Market Committee) meets eight times a year to decide monetary policy. At four of these meetings, it holds a press conference and releases a summary of economic projections.

Its first meeting of 2015 took place on January 27–28. Following the meeting, the FOMC issued a statement but didn’t follow up with a press conference.

In its statement, the FOMC stuck to the position that it would remain “patient” before making any policy moves. The statement read “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”

The Fed first used the word “patience” in its December 2014 meeting. You can read more about the outcome of that meeting in our series, Why the FOMC will remain “patient” in its policy moves.

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Federal funds rate

The Fed’s patient stance implies that the federal funds rate will remain in the target range of zero to 0.25%. The New York Federal Reserve Bank defines the federal funds rate as “the interest rate at which depository institutions lend balances to each other overnight.” This rate has remained in the zero to 0.25% range since December 2008.

Importance of the decision

The FOMC’s decision to keep the interest rate at historic lows was expected. Any such decision assumes importance because a rise in the rate would be followed by a general rise in rates throughout the financial system—from loans to Treasuries.

Since Treasury prices and yields are inversely related, a rise in yields, which follows a rise in interest rates, leads to a fall in prices. This negatively impacts ETFs including the iShares Barclays 20+ Year Treasury Bond ETF (TLT), the iShares Barclays 1-3 Year Treasury Bond ETF (SHY), and the iShares Barclays 7-10 Year Treasury Bond ETF (IEF).

Equity ETFs such as the SPDR S&P 500 ETF Trust (SPY) and the iShares Core S&P 500 ETF (IVV) also watch FOMC announcements.

In the next article in this series, we’ll look at what the FOMC had to say about normalizing its balance sheet.

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