FOMC Meeting: What You Need to Know
The Federal Open Market Committee, also known by the acronym ‘FOMC’, is the twelve-member committee within the Federal Reserve which is the U.S. central banking system responsible for determining monetary policy. Given the fact that the FOMC decides the trajectory and policies of the world’s biggest economy, its meetings are highly awaited by traders and analysts alike as they can have a significant impact on the markets and can even create market volatility.
Yesterday, March 22nd, the FOMC concluded its latest summit with a quarter-point rate hike. Amidst the latest banking turmoil and rising inflation, now, more than ever, the Fed’s rate decisions may have an even heavier impact on the state of the economy. Here’s a brief recap of the Fed’s latest meeting, its impact on the markets, and an overview of how the Fed operates:
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.
Furthermore, to understand how the Fed operates better, it may be worth keeping in mind ‘hawkish vs. dovish’ monetary jargon which is used to describe the different Fed monetary stances. Accordingly, 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. Following this logic, in the past few months, given the fact that the Fed and other central banks consistently hiked interest rates to tame inflation, many described the Fed’s monetary policy as hawkish. Some analysts even claim that the latest rate hike “is about as hawkish as the Fed can be given the banking sector stresses that are ongoing.”
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 meeting, which began on Tuesday, March 21st, and concluded on Wednesday afternoon, the 22nd of March, with a press conference, was the committee’s second meeting of 2023.
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. (Source:Investopedia)
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.
Furthermore, due to the latest banking sector crisis, which started with Silvergate Capital and Silicon Valley Bank’s (SVB) going bankrupt earlier this month, the Fed’s interest rate decision can have an even more tangible impact on the U.S. economy and the global economy as well as it is believed that higher interest rates can put bigger pressure on the markets, especially on tech and banking stocks. Therefore, while it may have not come as a surprise to learn that the Fed ended up hiking rates again, many may have hoped or thought that the Fed would take a more dovish approach and halt the rate hikes in order for the markets to be able to recoup some of their recent losses.
The Stock Market’s Response to the Fed Rate Hike
Although some Fed officials have already acknowledged that the recent market escalations triggered by the banking sector’s troubles along with other factors have definitely put strain on the economy, they still cling to their hawkishness which was highlighted further in yesterday’s 25 basis points rate hike. This rate hike which put the benchmark interest rate’s range between 4.75% to 5%, is believed to be the highest since 2006.
In response to this hawkishness, major Wall Street indices slid. The tech-heavy Nasdaq (US-TECH 100), the S&P 500 (USA 500), and the Dow Jones Industrial Average (USA 30-Wall Street) all tumbled by 1.60%, 1.65%, and 1.63% respectively following yesterday’s meeting. In addition, these losses were extended across the Forex market as the U.S. Dollar seemed to be losing some of its traction and reaching 7-week record lows.On the other hand, some Asian indices registered gains as Hong Kong’s leading index, the Hang Seng (Hong Kong 50), rose by 2.34% as of the time of the writing. This rise was attributed to gains led by Chinese entertainment and tech giant, Tencent (0700.HK) which soared by 7.6% following an upbeat earnings report on Wednesday.
Nonetheless, while the rate hike may have been gloomy news to many market sectors, the EUR/USD, one of the most traded Forex pairs in the world, rose by 0.34% as of the time of the writing. In addition, Gold (XAU), too seemed to have benefitted from this monetary decision as it gained 0.28% as of the time of the writing.
In addition, it seems that the Fed’s latest decision has also put pressure on banking stocks, which have already been making the headlines numerous times this month. Major banks like JPMorgan (JPM) and Bank of America (BAC) both slid by 2.6% and 3.2% respectively on Wednesday.
2023’s Upcoming Fed Meetings Calendar
As the economy’s fate is still blurrier than ever, traders and market watchers alike may want to keep an eye out for any upcoming Fed meetings to see if the central bank will adopt a less hawkish tone in the near future. Here are the scheduled Fed meetings for the upcoming months:
May 2-3
June 13-14
July 25-26
September 19-20
October/November 31-01
December 12-13
