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, 31 July 2024, the Fed met for the fifth time this 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% at a 23-year high. Still, the Fed hinted that inflation is easing, leaving the door open for a possible rate cut in September. 

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 fifth meeting of 2024 began Tuesday, 30 July, and concluded Wednesday, 31 July. It was 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?

Given his status as the Federal Reserve’s chairman, Jerome Powell’s speeches are highly esteemed and can even shift the markets. 

In his speech, Powell revealed that inflation has made “some further progress” and stated that a September rate cut may be “on the table.” This, according to Powell, will be possible if inflation continues to drop, nearing its 2% target. Nonetheless, Powell also cautiously approached the possibility of rate cuts, further increasing the doubts about whether it would happen. 

Additionally, Powell tackled some concerns regarding the effects of the upcoming U.S. presidential election on the Fed’s policy. He stated that the upcoming elections will “absolutely” not affect the U.S. central bank’s decision. He said the Fed would be apolitical “if it lowered borrowing costs at the meeting.” He also said that the Fed never uses its tools “to support or oppose a political party, a politician, or any political outcome” and that the forecasts are apolitical. He went on to say that making a decision “based on the outcome of an election that hasn’t happened yet” would be a “line [the Fed] would never cross.” 

Besides politics, the Fed also revealed that it will be closely watching the labour market for further insights, noting that “low unemployment and a low level of layoffs suggest a normalising labour market.” 

So What Is the Fed Looking For?

Overall, the Fed seems to aim for lower inflation, a healthier labour market, and an economy that moves “closer to the point at which it would be appropriate to reduce [the] policy rate.”

Still, according to Powell, “the question will be whether the totality of the data, the evolving outlook and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labour market.”

Finally, Powell said that if the above is achieved, the Fed’s policy reduction “could be on the table for as soon as the next meeting in September.”

However, only time will tell what lies ahead for the world’s biggest economy and monetary policy. Traders will have to keep tabs on any upcoming news or economic events to see what might await them and how these might affect the Fed’s rate decision on 17-18 September.

What Does the Decision Mean?

The possibility of rate cuts can affect savings accounts since these will “continue to outearn inflation for the foreseeable future” even if rates drop. It can also reduce borrowing costs, affecting credit cards, auto, and mortgage payments. In addition, some stocks may benefit from this decision, as seen in yesterday’s rally. 

However, these are all projections, and the actual outcomes of these possible decisions are yet to be determined.

How Did the Markets React?

The markets moved higher, having been “looking for signs that the Fed will reduce rates when it next meets in September.” 

The Leading Wall Street indices, the S&P 500, the Nasdaq (US-TECH 100), and the Dow Jones Industrial Average (USA-Wall Street 30) rose by 1.6%, 2.6%, and 0.2%, respectively. Moreover, the Russell 2000 (RTY) edged 0.5% higher. 

Interestingly, while it might not be directly related to the FOMC meeting, tech stocks rallied on Wednesday. AI giant NVIDIA (NVDA) gained 13%, while Micron (MU) rose 7.1%. This, in turn, may have highlighted the fact that “investors aren’t giving up on tech behemoths just yet.”

It will be worth tracking any price changes ahead of Friday’s upcoming jobs data report.

Conclusion

In conclusion, the Fed maintained unchanged rates as it sought additional signs of inflation nearing its target and evaluated further economic data. Will the Fed cut rates anytime soon? Will inflation continue to take a toll on the world’s biggest economy? Only time will tell.