Federal Reserve Meeting (FOMC)

The Federal Open Market Committee (FOMC) is the monetary policy​-making branch of the Federal Reserve, the US central bank. It is responsible for managing the supply and cost of money and credit in the economy, aiming for inflation at a rate of 2%, maximum employment and economic growth.

Its key role is deciding whether interest rates will go up, down or remain stable. It does this by setting a target range for the federal funds rate, which is the rate at which banks lend to each other. Changes to this rate can affect other interest rates, increasing or decreasing borrowing costs for consumers and businesses.

After interest rates, the main monetary policy tool that the FOMC uses is the buying and selling of government bonds​​ on the open market, which is known as quantitative easing.

The FOMC holds eight scheduled private meetings throughout the calendar year, with others being arranged as and when needed. During these meetings, members of the committee will vote on monetary policy. The FOMC is made up of 12 members. This consists of seven members of the Board of Governors, plus the president of the Federal Reserve Bank of New York and four regional Federal Reserve Bank presidents on an annual rotational basis.

The FOMC was created in the Banking Act of 1935, during the Great Depression, to ensure a national strategy rather than a series of independent regional monetary policies.

The next FOMC meeting will be held on 27 and 28 July 2021. The FOMC will review current economic and financial conditions such as equity prices, treasury yields, inflation and employment numbers, and what these types of economic indicators​​ might mean for monetary policy.

A vote on policy strategy is taken at the conclusion of the discussions and the outcome is announced in a policy statement and press conference held by the chair of the Federal Reserve, usually at 2pm on the second day.

Minutes of the meetings are released three weeks after the meeting is held. The minutes record the main areas of discussion, such as developments in financial markets and a review of the current economic situation. They outline the decisions taken by the committee and an explanation of the reasoning behind them. The minutes also reveal wording related to the FOMC’s views about potential future monetary policy.

Four times a year — in March, June, September and December — the FOMC provides economic projections looking at GDP, unemployment rates and inflation for the current year and in the longer term. One of the most revealing projections is the committee’s “dot plots", where each member pots their view of where interest rates might be in the next 3 years and in the longer term. This is a particularly useful piece of information as it will allow market participants to see if the consensus path for longer term rates is changing.

For example, the June chart showed that 13 out of 18 federal officials expected at least one interest rate hike during 2023.

The FOMC meetings and subsequent policy statements give a clear indicator of the state of the US economy. The announcement typically produces strong market movements in all areas, from equities to bonds and commodities such as gold.

As a result, long-term traders can reformulate strategies around higher or lower interest rates, more bond purchasing or quantitative easing, expectations of higher or lower inflation, and the overall economic outlook. Traders anticipating higher interest rates could increase their exposure in banks and financial stocks, and lower exposure in high dividend-paying sectors such as utilities or bonds.

The FOMC’s discussions and announcements over the economic outlook and the direction of inflation could also mean a switch from growth stocks​​ to value stocks, as value stocks tend to be preferred by investors in periods of economic uncertainty because they offer more stable long-term investments. Growth stocks on the other hand tend to perform well under stronger economic conditions. There are also opportunities for day traders to take advantage of volatility in the markets, both prior to the announcement and immediately afterwards.

Traders can also analyse the tone of the FOMC announcement to determine whether there are more hawks than doves among its members and whether that balance has changed since the last meeting. A hawk favours higher interest rates to tackle inflation and growth, while a dove favours a lower interest rate to support growth and inflation.

The main result of the following open market operations has been the increase in the Fed’s balance sheet and the lowering of interest rates.

Forex. A change in interest rates can impact the value of the US dollar. Higher yields tend to make the dollar more attractive for both domestic and global investors.

Equities. Higher rates can steer some investors away from equities and into other areas such as cash. Conversely, lower interest rates may make equity trading more attractive as companies can use it to borrow more capital and drive growth. Higher inflation can also impact valuations, particularly of growth stocks.

Commodities. The value of gold tends to fall if interest rates rise.

Bonds. Bond prices tend to go down when interest rates rise and up when they fall. However, the rate of increase or decline depends on bond maturity. The longer the maturity, the greater the drop if rates are hiked.

According to the Fed, in April 1942, it committed to keeping a low interest-rate peg of 3.8% on short-term Treasury bills. It also capped the rate on long-term Treasury bonds at 2.5%. This led to the Fed buying up large amounts of government securities and ramping up money supply. It allowed the government to engage in cheaper debt financing to help fight the Second World War. The Dow Jones Industrial Average index fell to $92.92 in April 1942, but then sprang into a bull market​​ ending in 1945 at just below $200.

In an unscheduled FOMC meeting on 6 October 1979, Federal Reserve System Chair Paul Volcker announced new measures to rein in inflation, which was around 9% annually at that time. According to the Federal Reserve, reporters rushed to the announcement to hear that the Fed would shift its focus to managing the volume of bank reserves in the system instead of trying to manage the day-to-day level of the federal funds rate. It was an approach that would lead to more fluctuation in rates. Volcker told reporters: “By emphasising the supply of reserves and constraining the growth of the money supply through the reserve mechanism, we think we can get firmer control over the growth in money supply in a shorter period of time.” However, he warned that there would be “some difficult adjustments ahead”. Indeed, interest rates reached 20% in 1980, inflation soared to 11.6%, and a recession took hold. Car dealers hit by high rates sent coffins to the Fed containing the car keys of unsold vehicles.

In December 2012, the FOMC brought in a strategy of threshold-based forward guidance as the US continued its recovery from the Great Recession of 2007–2009. It said that low interest rates would remain as long as the US employment rate was over a threshold value of 6.5% and inflation was no more than half a percentage point above 2%. The Dow Jones Industrial Average fell from $13,245 on 12 December to $12,938 on 31 December.

In an unscheduled meeting on 15 March 2020, in response to the emergence of the COVID-19 pandemic, the FOMC lowered interest rates to a target of 0% to 0.25%, down from 1% to 1.25% — a move designed to bolster the economy. It also increased holdings of Treasury securities by at least $500bn to ensure money supply.