10 Charts Explaining the Complexity of the December FOMC Decision

Federal Reserve The Great Debate

The long-awaited Federal Open Market Committee decision on whether to raise rates or keep them near historic lows happens Wednesday at 2:00 p.m. Below are 10 charts that highlight everything you need to know ahead of the action.

The Federal Funds rate, the FOMC’s primary policy tool, has been in a target range of 0.0%-0.25% for seven years. In fact, the Fed made its unprecedented move on December 16, 2008, exactly seven years ago today.  The Fed has not raised interest rates in about 9 ½ years (since June 2006):

This is a comparison of the Federal Funds rate and the Federal Reserve's preferred inflation gauge, the year-over-year change in core personal consumption expenditures.  Core PCE is currently up just 1.3% from a year ago. That is materially below the Fed's inflation target of 2.0%, and significantly under the 2.5% level that the Fed has said would likely trigger a rate hike. Bottom line: despite massive monetary stimulus and seven years of zero-interest-rate policy, inflation pressures remain absent from the U.S. economy.

Not only is price inflation a no-show, central bankers are also not seeing any pressures from rising wages, something that FOX Business has been pointing out since early 2011. In the most recent November employment report average hourly earnings were up 2.3% from a year ago. That’s on the high end of the 6-year range, and is only slightly ahead of price inflation as measured by the Consumer Price Index:

Here is a look at growth in average hourly earnings and core consumer prices (CPI less food and energy).  You can see that wage growth is only slightly outpacing inflation. This narrow gap is a key reason why consumers don’t feel like they’re getting ahead:

The dollar rose sharply against other major currencies from mid-2014 into March of this year in anticipation of Fed tightening. Since mid-March, however, the greenback has gyrated in volatile trading mostly because of uncertainty over the timing of the Fed’s first rate move. The Dollar Index is near the high end of its recent range, signaling that investors are confident the Fed will make its long-awaited move today. Trading in derivatives tied to the Federal Funds rate suggest an 81% probability that policy makers will lift the benchmark one-quarter of a percentage point to a new range of 0.25%-0.50%:

Here is a look at the Federal Reserve's balance sheet in the context of the central bank's various stimulus measures.  It has leveled off at just under $4.5 trillion almost 14 months after the Fed announced the end of its last round of quantitative easing.

This is a comparison of the Fed’s balance sheet with the Dow Jones Industrial Average since the bull market began on March 9, 2009. As the balance sheet swelled to historically high levels, the blue chip index hit 38 record highs in 2014 and six this year, most recently on May 19. Economic growth and the labor market continue to improve, however the pace of growth is historically far weaker than it should be six-and-a-half years out of a recession.

This indicates that much of the Fed’s stimulus money has been funneled into assets such as stocks rather than going to capital expenditures and other measures that would stimulate growth and create jobs. Another interesting point: note that the Dow is trading only 150 points above its level in late October 2014 when the Fed ended its QE bond-buying, essentially going nowhere in the absence of Fed ‘juicing’.

Here’s a look at Treasury yields across various maturities over the past year. The rise in 2-year yields to the highest since 2010 is consistent with expectations for a Fed rate hike:

1 year

5 years

For some global context and perspective, here’s a look at the Federal Reserve’s funds rate compared with the benchmark short-term lending rates of the world’s major central banks. In October China cut its benchmark rate to a record low. It was the sixth rate cut since November 2014 and contrasts with the Federal Reserve which is on the verge of raising its key lending rate from an all-time low:

Charles Brady is Manager of Business News and Senior Editor of the FOX Business Network.