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 November 1, 2023, in its seventh and penultimate monetary policy meeting of the year, the Federal Open Market Committee (FOMC) announced its decision to uphold the benchmark interest rates within the 5.25% to 5.5% range for the second consecutive time. This marks the Fed's highest rate since 2001.
Nonetheless, despite preserving these rates at levels similar to those set in September, the U.S. Central Bank signaled its commitment to pursuing further rate increases (if needed) in the coming months as it grapples with the ongoing battle against inflation in the world's largest economy.
While some bullish investors seem to be optimistic about the prospect of significant rate declines in 2024 and beyond, the Fed stated it would evaluate the “extent of additional policy firming,” refraining from confirming the end of the current tightening cycle
As we approach the conclusion of the year, with only one more FOMC rate decision on the horizon, many may naturally be curious about the implications of the Central Bank’s decisions, 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. (Source: Federal Reserve.Gov)
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.
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 seventh meeting of the year began Tuesday, October 31, and concluded Wednesday, November 1 followed by 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.
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.
How Does the Fed View the U.S. Economy?
The Fed may have delivered a boost of optimism for many Americans, upgrading its Q3 economic assessment from "solid" to "strong.”
This may have signaled a positive turnaround for the world's largest economy after months of uncertainty, persistent inflation, recession concerns, and the looming possibility of a U.S. government shutdown, among other factors.
According to the Central Bank, "Recent indicators suggest that economic activity expanded at a strong pace in the third quarter.” In addition, the Fed noted that jobs have “moderated” whereby in September they revealed that job growth “slowed.” In addition, the Fed mentioned that unemployment is still low.
Some factors contributing to this brighter outlook seem to include the recently released U.S. GDP figures on October 26, revealing the fastest economic growth in the country in the past two years.
Nonetheless, despite these rosy revelations, Fed Chair Jerome Powell stated that the FOMC will take it “meeting by meeting” and will be “proceeding carefully,” hence leaving the possibility for more hikes on the horizon. He also explicated that the Fed “is not thinking about rate cuts right now at all."
How Are the Markets Reacting to the Latest Fed Meeting?
As the Fed kept its rates unchanged, many major Wall Street Indices rallied on Wednesday. The S&P 500 (USA 500) and the Dow Jones Industrial Average (USA 30- Wall Street) rose by over 1% and over 0.6% and the tech-heavy Nasdaq (US-TECH 100) rose by over 1.7% that day.
December 2023’s Upcoming Fed Meeting
The Fed will decide on rates for the last time this year on December 12-13. Given that this is the last meeting of the year, many may naturally be wondering about which path the Fed will take this time and ahead of 2024.
According to Powell, the committee hasn’t made their December decisions yet and even if the decision is made to keep rates unchanged for the third consecutive meeting, this choice should not imply increased difficulty in resuming rate hikes later on.
As Powell mentions “the idea that it would be difficult to raise again after stopping for a meeting or two is just not right.”
Therefore, whether or not the Fed will maintain rates unchanged yet again, is still undetermined. (Source: CNBC)
Whereas the Fed kept its rates unchanged, it is crucial to keep in mind the fact that the economy and the markets can be unpredictable and that various factors can influence the U.S. Central Bank’s decisions.
Beyond the Fed’s decision, traders and consumers alike may want to keep track of other important economic data releases like today’s Bank of England (BoE) meeting and China Caixin Services Purchasing Managers Index (PMI), and Friday’s ISM and S&P Global Composite PMI reports.