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 September, the Fed embarked on its first rate cut in four years (since the Covid pandemic). It slashed rates by half a percentage point, adhering to the cut expectations discussed multiple times this year. Sings of slowing inflation seem to be the reason behind this monetary policy turn of events. Notably, the cut comes after a hawkish stance taken by the Fed over a few years.

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 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 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 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 sixth meeting of 2024 began Tuesday, 17 September, and concluded Wednesday, 18 September. 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.

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's speech revealed that the latest decision was “the right thing for the economy and the people,” adding that the decision reflects the Fed’s “growing confidence that with appropriate recalibration of [its] policy stance, strength in the labour market can be maintained in the context of moderate growth and inflation moving sustainably down to 2%.” Moreover, he stated that the decision is driven by the Fed’s “dual mandate to provide maximum employment and stable prices for the American people.”

Despite the positive outlook, the Fed will likely monitor inflation ahead of its upcoming last two meetings of the year in November and December. In addition, the labour market may be one of the Fed’s main focal points, especially because it “isn’t as robust as it was,” and many economists warn of a possible recession.”

What Does the Decision Mean?

The main effect this could have is the obvious one: slow down inflation. Furthermore, 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.

However, the decision is still fresh, and only time will tell what actually lies ahead for the economy.

How Did the Markets React?

Following the recent Fed decision, Wall Street indices like the Nasdaq and the S&P 500 rose after the announcement but then dropped by about 0.3% each, while the Dow Jones Industrial Average lost about 0.25%.

In the Forex market, the U.S. dollar weakened against other currencies. It will be worth seeing what other effects this decision will have on the markets in the near future. 

Traders may want to keep an eye on any substantial news and economic events that may also come into play. (Source: The New York Times)

Conclusion

In conclusion, the Fed cut rates for the first time since the Covid pandemic as inflation showed signs of cooling. 

What else awaits the world’s biggest economy, and how might this substantial monetary policy decision affect the global markets? Only time will tell.