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, 18 December, the Fed made its final monetary policy decision for 2024, a year in which many central banks had to tackle rising inflation and economic hurdles. 

In this meeting, the US central bank decided to cut rates by 25 basis points and signalled fewer interest rate cuts in 2025 (two rate cuts, to be exact). Following the meeting, Fed Chair Jerome Powell delivered remarks.

In light of this decision, major Wall Street indices tumbled. Let’s take a closer look at what the FOMC is, why it’s important, and how it affected the markets:

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 utilises 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 US  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 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 eighth and final meeting of 2024 began Tuesday, 17 December, and concluded Wednesday, 18 December. 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. (Source: Yahoo Finance)

Key Takeaways: 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. 

Powell revealed that the Fed will continue to monitor inflation for any signs of cooling, noting that it “has been moving sideways on 12-month inflation.” He also addressed rising consumer prices, saying that the Fed understands that “inflation is way down—but people are still feeling high prices—and that is really what people are feeling,” indicating that there may be a long way to reach the desired inflation target to help wages catch up with the rising costs. He also addressed the state of the US labour market, noting that it is not cooling in a “quick way,” which “really raises concerns.”

In addition, Powell addressed the latest Bitcoin hype and Donald Trump’s Bitcoin endorsement by stating that the Fed is not allowed to own Bitcoin in accordance with the Federal Reserve Act and that they are “not looking for a law change.”

What Does the Decision Mean?

As stated above, the decision shows that despite the Fed’s numerous attempts to tame inflation, it seems that the latter is still stubbornly high and that the health of the world’s largest economy still needs to improve. 

As such, with fewer rate cuts in line for the next year, it will be interesting to see what other factors will affect the Fed’s decision and whether the central bank will indeed stick to its projected 2 rate cuts in 2025 or adopt a more hawkish or more dovish stance. 

Factors like the Trump administration can affect this powerful institution's monetary policies in the near future. According to Powell, the Fed is contemplating how Trump’s lower taxes and higher tariffs can shift the economic landscape. Interestingly, earlier this month, Bank of Japan’s (BoJ) Governor Kazuo Ueda also addressed Trump’s plans stating that they are “a risk.”

How Did the Markets React?

Following the recent Fed decision, major Wall Street indices like the Nasdaq 100 (NQ), the Dow Jones Industrial Average (YM), and the S&P 500 (ES) plunged 3.6%, 2.5%, and 2.9%. 

Will these major indices recover anytime soon? Only time will tell. 

Conclusion

The Fed seems to be adopting a more hawkish tone in the last days of the year as inflation, a weakening labour market, and uncertainties surrounding the impending Trump administration continue to take a toll on the world’s biggest economy. 

What will the economic landscape look like in 2025? Will the Fed stick to its projected rate cuts? Will there be any surprising turn of events? Traders and consumers will have to wait and see.