The Federal Open Market Committee, also known by the acronym ‘FOMC’, is the twelve-member committee within the United States Federal Reserve responsible for determining monetary policy. Accordingly, their decision-making process is highly anticipated by market participants and consumers alike.
On September 20, 2023, during its 6th monetary policy meeting of the year, the Federal Open Market Committee (FOMC) declared its intention to maintain its benchmark interest rates in the range of 5.25% to 5.5%.
Despite preserving these rates at levels similar to those set in July, the U.S. Central Bank signaled its commitment to pursuing further rate increases in the coming months as it grapples with the ongoing battle against inflation in the world's largest economy.
As we approach the conclusion of the year, with only two more FOMC rate decisions on the horizon, many may naturally be curious about the implications of this hawkish stance, and the financial markets are responding accordingly. Here’s what you need to know about the FOMC, its structure and functions, and the market’s reaction to its latest decisions:
What Is Monetary Policy?
Monetary policy denotes the moves taken by a nation’s central bank, in this case, the Federal Reserve, to ‘move the needle’ with regard to the availability and cost of cash and credit. There are three main levers the Federal Reserve of the United States utilizes to enact monetary policy: the discount rate, bank reserve requirements, and open market operations (OMO); the Federal Open Market Committee is responsible solely for the latter.
What Are Open Market Operations and How Are They Used?
Open Market Operations are the sale and purchase of government-backed Treasuries and securities on the market. The federal funds rate, which is set by the Fed’s Board of Governors, is the rate of interest for overnight loans that American banks charge each other; this rate also serves as a benchmark for mortgage rates, interest on credit cards, and more.
The interest rate banks charge each other is crucial, because interbank loans enable banks to keep their cash reserves high enough to satisfy consumer demand for loans.
The FOMC uses Open Market Operations as its main tool to ‘push’ the market to that target federal funds rate. When Treasuries and other securities are purchased, using freshly-printed money, the money supply on the market increases, and the interest rate banks charge each other for overnight loans goes down. The money supply falls, and interest rates rise when the FOMC makes the decision that the Federal Reserve should sell Treasuries and securities that it is currently holding.
The monetary track embarked on by the Federal Reserve is vital because Treasuries are bought and sold by the Fed in such large quantities that they directly influence the overall interest rates available to banks and everyday consumers alike. When more securities are purchased, the supply of money available in U.S. bank reserves rises, so loans become easier to obtain and interest rates decrease.
How Does the FOMC Decide What Road to Take?
Depending on the overall economic climate, and the FOMC members’ assessment thereof, the FOMC determines whether the Federal Reserve will either buy or sell government-backed securities.
In times of economic strife, the FOMC tends to recommend buying securities in order to support economic growth; the inverse is true when the national economy seems to be on more stable ground. However, given that economic judgments are not always objective, there can sometimes be disagreements within the FOMC.
Many factors go into the FOMC’s ultimate determination; members review overall economic indicators such as inflation, unemployment, and GDP. In addition, they may even consider how a change in monetary policy could affect specific industries within the American marketplace.
The FOMC Meeting minutes, which provide a detailed summary of the discussion conducted between committee members, reveal exactly which factors lead to the Fed’s monetary policy decisions, as well as the various members’ views. While a press conference is conducted shortly after the FOMC meeting ends, the minutes are not released for a full three weeks following the meeting’s conclusion, so much of what goes into the committee’s decision remains a mystery to the public for nearly a month afterward. (Source:Forbes)
FOMC members can often be referred to as ‘hawkish’, those favoring less bond-buying, ‘dovish’, who take the opposite view, or ‘centrists’, whose approach lies somewhere in between. The relative proportion of those holding each view has important repercussions for how the Federal Open Market Committee functions.
How Does the FOMC Operate?
Eight times a year, or more depending on necessity, the committee holds a meeting to decide on the course of federal monetary policy in the near term. At the meeting, held in Washington, D.C., committee members will review the nation’s macroeconomic conditions, assess risks, and determine the direction best suited to the FOMC’s goals of keeping prices stable along with an overall sustainable rate of economic growth. The twelve members then vote on whether buying or selling securities is more likely to attain these goals. The committee's sixth meeting of the year began Tuesday, September 19th, and concluded Wednesday, September 20th, with a press conference.
Who Sits on the FOMC Committee?
Of the twelve members of the FOMC, seven are Federal Reserve Board of Governors members. The Board of Governors’ chair serves as the FOMC’s chair concurrently. The members of the Board of Governors are appointed by the U.S. President and serve for fourteen years on the board.
The Federal Reserve Bank of New York’s president, since 2018, John C. Williams, is a perpetual member of the committee. Four of the remaining eleven regional Federal Reserve Bank presidents also serve on the FOMC in one-year rotations to ensure representation from all regions of the United States.
How Does the Fed Influence the U.S. Economy?
When the Federal Reserve moves to increase interest rates, it can have an outsize effect on the economy as a whole. If the FOMC moves to sell securities, thus increasing the federal funds rate and interest rates across the economy, various firms’ assessment of their future revenue flows can be negatively affected, as debt expenses will grow.
If investors believe that debt servicing could have a negative effect on a company’s revenue growth, they’ll be less inclined to buy that company’s stock, the price of which will fall. The financial sector, conversely, stands to gain from an interest rate rise, since they’ll then be able to gain more from lending fees.
What Does the Latest Fed Rate Decision Mean for Credit Card Debt?
According to some market experts, even though the Federal Reserve has opted to maintain its current interest rates, “Americans with credit card debt won't see any relief even after the Federal Reserve decided against hiking its benchmark rate on Wednesday.” Essentially, their situation might not deteriorate at the moment.
However, there may be reason to be cautious, as Federal Reserve Chair Jerome Powell has hinted at the possibility of further increases in interest rates down the road. As such, given that credit card interest rates typically move in tandem with the central bank's rates, there may be a likelihood of these rates rising before the year concludes.
As a result, some believe that rates will persist at levels close to the highest seen in four decades for an extended period, which could be distressing for individuals burdened with debt.
Moreover, according to credit industry analyst, Matt Schulz, “even though the Fed chose not to raise rates in September, the truth is that no one should expect credit card interest rates to stop rising anytime soon.” Schulz also said that “while we don’t know what the Fed will do going forward, cardholders’ best move is to assume that rates will continue to rise and do what they can to knock their credit card debt.”
Still, nothing is certain as there are other economic factors that could come into play and consumers will have to keep tabs on other key factors and economic events to see how these might affect their credit debt.
How Are the Markets Reacting?
It seems that many markets did not react positively to the Fed decision as key Wall Street Indices like the S&P 500 (USA 500) fell by 0.9% on Wednesday. In addition, some big tech stocks, which are known to be more sensitive in the face of rate hikes fell, and the tech-heavy Nasdaq (US-TECH 100) lost over 1.5% that day. Moreover, the Dow Jones Industrial Average (USA 30-Wall Street) fell by 0.2%.
Upcoming Fed Meetings in 2023
Given that the journey to taming inflation is still far from over and the fact that the year is nearing its end, traders, analysts, and consumers may want to keep in mind the Fed’s upcoming meetings to see if any substantial changes materialize and if this can have a significant impact on the markets.
Here are the scheduled Fed meetings for the rest of the year (Source:The Federal Reserve):
While the signs seem to point toward further rate hikes in the near future, the economy and the markets can be unpredictable and time will only tell whether or not these predictions will hold true.
Beyond the U.S., traders and consumers alike may want to keep track of other important economic data releases around the world like today’s BoE rate decision and Friday’s BoJ decision to see how the global economy is faring.
For now, according to Powell, the Fed is “in a position to proceed carefully in determining the extent of additional policy firming” and it wants to “see convincing evidence” that the hikes are working before reaching a conclusion.