FOMC Meeting: What You Need to Know

The Federal Open Market Committee, also known as the 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 Wednesday, March 20, 2024, the Fed met for the second time in a year, amidst expectations of rate cuts and dovish monetary policy. In this meeting, the U.S. central bank revealed that it would keep its benchmark rates unchanged at 5.25%, marking the 5th consecutive time the Fed kept its rates intact. 

But what exactly is the Federal Reserve's FOMC committee? Why are its decisions important? How did the markets react to yesterday's rate decision? Will the Fed cut rates this year? And what did Fed Chair Jerome Powell reveal in his speech? Here's what you need to know:

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. (Source:Federal Reserve)

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 afterwards.

FOMC members can often be referred to as ‘hawkish’, those favouring 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 second meeting of 2024 began Tuesday, March 19, and concluded Wednesday, March 20, followed by a press conference and a speech by Fed Chairman Jerome Powell.

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.

In addition, it may be worth noting that the Fed’s decision can have a notable impact on stocks, in general, and on tech stocks in particular. This is because tech stocks, which are usually considered growth stocks, tend to be susceptible to higher rates since they are “long-duration” assets. 

In addition, during times of inflation and high interest rates, many investors and traders shy away from tech stocks as they opt for safe-haven assets instead.

What Did Powell Reveal in His Speech?

In his speech, Powell revealed that the Fed is still looking for data to give them a “higher degree of confidence” that inflation is indeed nearing the Fed’s 2% target before the U.S. central bank moves to the anticipated rate cuts. This is because the latest CPI and PCE for January and February showed that inflation is still hotter than the Fed expected. 

In addition, Powell commented on the state of the U.S. labour market and said that “an unexpected weakening in the labour market could also warrant a policy response.” He also stated that “strong hiring in and of itself would not be a reason to hold off on rate cuts.”

Despite Wednesday’s decision to keep rates intact, the Fed signalled that it would cut rates three times this year. 

So What Is the Fed Looking For?

According to some market watchers like chief global strategist, Seema Shah, before the Fed could move to rate cuts, it would take into account the following factors:

• Decreased unemployment rates.

• Stronger economic growth.

Nonetheless, Shah warns that cutting rates too might be risky, especially in light of the fact that inflation is still not near the Fed’s 2% target while GDP remains high.

The Fed’s New Dot Plot

The Federal Reserve also unveiled its Dot Plot—a visual depiction employing data points represented as dots on a graph (issued quarterly). This graphical representation illustrates the forecasts of Federal Fund Rates by Fed members, with each member's projection being depicted anonymously as a dot.

Given the Dot Plot’s importance, traders may be interested to know that the latest Dot Plot showed that many Fed officials believe that the Fed funds rate will reach a midpoint range of 4.6% throughout 2024.

Moreover, the Dot Plot showed a division among the Fed members regarding when the Fed should embark on these three rate cuts, down from the previously expected four cuts.

As for 2025, a decrease in the projected number of rate cuts was revealed. Nonetheless, only time will show that this powerful central bank will actually decide what economic factors will materialise. 

How Did the Markets React?

Following the release of the FOMC’s decision on Wednesday, Wall Street indices rallied. The S&P 500, the Nasdaq (US-TECH 100), and the Dow Jones Industrial Average (USA 30) respectively gained about 0.9%, 1.3%, and 1% on Wednesday, March 20th.

The Fed’s Effect

Beyond the effect it has on the markets, consumers may be interested in knowing how this decision might affect their money. 

According to some market experts, mortgage rates could decline if inflation eases (as expected) and economic growth moderates, which, in turn, could be a relief to homebuyers. 

This could also affect borrowers. On the one hand, existing borrowers may be shielded from the immediate impacts of rate fluctuations. On the other hand, new borrowers might face higher rates. Nonetheless, the Fed's decision to keep rates steady could help ease the impact.

Finally, the Fed’s decision can also impact the U.S. government, which faces trillions of dollars in debt. If the Fed chooses to pause rates, it would ease borrowing costs for the government for a while.

Conclusion

In conclusion, the Fed maintained unchanged rates as it seeks additional signs of inflation nearing its target and evaluates further economic data. However, it also disclosed an anticipation of three rate cuts by year-end. Whether it will adhere to these expectations remains to be seen.