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, May 1, 2024, the Fed met for the third 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% for the 6th consecutive time and hitting a 23-year high. 

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 third meeting of 2024 began Tuesday, April 30, and concluded Wednesday, May 1, 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?

In his speech, Fed Chair Jerome Powell revealed that despite the initial expectations of rate cuts this year, the world’s largest economy’s central bank may still need some time before taking such measures. 

According to Powell, inflation remains stubbornly high and the Fed still needs to gain “greater confidence that inflation is moving sustainably toward 2 percent” before rate cuts materialize. He explained that inflation has exceeded expectations, increasing the Fed’s uncertainty and possibly postponing rate cuts. 

As for questions surrounding the possibility of hawkish rate hikes, Powell answered that the Fed “would need to see persuasive evidence that [their] policy stance is not sufficiently restrictive to bring inflation sustainably down to 2 percent.” He also said that “it is unlikely the next policy move will be a hike.” However, only time will tell what this powerful institution will end up doing in the months to come. 

So What Is the Fed Looking For?

Despite the fact that Powell explicitly said that he doesn’t “know how long it will take” to cut rates, some market watchers and financial institutions like the Bank of America (BAC) expect rate cuts this year, possibly in December.

Others, like, Daniel Murray, deputy chief investment officer at EFG Asset Management, are more uncertain regarding the possible trajectory of the Fed this year.

Besides inflation, it may be worth noting that factors such as the recently revealed high unemployment and mortgage rates, can also delay rate cuts. On the flip side, U.S. consumer spending has interestingly remained “robust” despite the disruptive economic conditions. 

How Did the Markets React?

Perhaps unsurprisingly, leading Wall Street indices closed Wednesday lower as the Dow Jones Industrial Average (USA 30) lost 0.2%, and the S&P 500 and the tech-heavy Nasdaq (US-TECH 100) lost 0.3%. In addition, key commodities Futures like Oil (CL) hit their lowest level since mid-March. 

This may be due to the hawkish approach and the signs showing that inflation is still far from the Fed’s target range. 

According to a chief fix income strategist, Guy Lebas, “while the markets had, once upon a time, expected rate cuts to commence as early as this spring, persistent upside inflation surprises through early 2024 had caused the Fed to delay the start of an easing cycle.” He also noted that the latest FOMC decision “amounts to a hawkish re-set of expectations.”

Conclusion

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