What is the Federal Open Market Committee meeting?
The Federal Open Market Committee (FOMC) meeting is a regular session held by the members of the Federal Open Market Committee, a branch of the Federal Reserve that decides on the monetary policy of the United States.
After deliberating on short-term monetary policy, the FOMC will decide on a target federal funds rate that they believe will achieve their aims.
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How does the Fed meeting affect traders?
The FOMC meeting is usually considered the most important date on any traders’ calendar, for one overriding reason: interest rates.
Using a trio of policy tools, the FOMC can raise or lower the federal funds rate in the US.
This central rate change will trickle down to other interest rates, including FX rates and bond prices, which can have a big impact on traders.
Which markets are affected by the FOMC?
If the FOMC chooses to raise or lower interest rates, the effects will reverberate across global financial markets. Here are a few specific markets to watch out for:
- Forex: Any interest change will play out on the US dollar, by far the world’s most traded currency.
- Indices: Higher rates tend to be bad for shares, while lower rates can be a boon.
- Bonds: US bonds are often where the fallout from interest changes is felt most directly.
So traders and investors around the world will attempt to predict where monetary policy is headed next in each Fed meeting, and adjust their strategies and portfolios accordingly.
Find out more about how the FOMC affects interest rates.
What is the federal funds rate?
The federal funds rate is the interest rate that banks charge each other for overnight loans, meaning that it effectively acts as the base interest rate for the US economy. Changes to the federal funds rate will impact short and long-term interest rates, forex rates, and eventually economic factors like unemployment or inflation. This, in turn, will play out across the global economy.
How does the FOMC affect the federal funds rate?
While it doesn’t have a direct say over the rates charged by banks to lend money to each other, the FOMC can indirectly change the fed funds rate using three policy tools that affect money supply. These are open market operations, the discount rate, and reserve requirements.
The FOMC is specifically in charge of open market operations, while the Federal Reserve Board is in charge of the discount rate and reserve requirements.
Open market operations
Open market operations are the buying and selling of government bonds on the open market.
When the FOMC wants to decrease monetary supply it will sell bonds, taking money out of the economy and in turn raising interest rates. When it wants to increase money supply, it will buy bonds, injecting money into the economy and lowering rates.
The discount rate
As well as borrowing this money from each other at the federal funds rate, banks can borrow money directly from the Federal Reserve itself.
The interest rate a bank will have to pay to borrow from the Fed is called the discount rate. A lower discount rate will encourage a lower federal funds rate, and vice versa.
Reserve requirements are the percentage of a bank’s deposits from customers that it has to hold in order to cover withdrawals.
If reserve requirements are raised, then banks can loan less money and will ask for higher interest rates. If they are lowered, then the opposite happens.
Federal Reserve quantitative easing
Quantitative easing (QE) is an extra measure that the Fed can apply in times of severe financial crisis. It is usually only used once the above policy tools have been exhausted – the federal funds rate is near zero, and economic growth is still faltering. What does the Fed do next?
In function, QE looks fairly similar to open market operations. The FOMC buys securities on the open market, injecting money directly into the system. However, there are two key differences between the two:
- Different assets are bought. Instead of focusing on short-term bonds, the FOMC will usually buy longer term securities, to reduce rates over the long term as well as the short term
- The aim is different. While open market operations are intended to lower the federal funds rate, QE purchases aim to massively increase money supply by adding to the Fed’s reserves
After the 2008 recession, the Fed undertook a series of QE programmes, pouring trillions of dollars into the US economy. However, it’s unclear how much QE helped the US economy recover.
Fed meeting dates
The FOMC will typically meet eight times a year, although there is scope for additional meetings if required. While any policy changes are announced immediately, the meetings are always secret, with minutes released three weeks after each session.
2019 FOMC dates
|29-30 January||20 February|
|19-20 March*||10 April|
|30-1 April/May||22 May|
|18-19 June*||10 July|
|30-31 July||21 August|
|17-18 September*||9 October|
|29-30 October||20 November|
|10-11 December*||1 January|
* Meetings are tentative until confirmed at the preceding session.
FOMC key people
The FOMC is made up of seven members of the Federal Reserve Board, plus five Federal Reserve Bank presidents.
The seven board members are all appointed by the US president, and the board chair usually serves as the chair of the FOMC. The five bank presidents consist of the president of the Federal Reserve Bank of New York – who also serves as the FOMC vice-chair – plus four others, rotated on a yearly basis.
Analysts will sometimes classify FOMC members as monetary hawks and doves with the aim of predicting the outcome of meetings.
2019 committee members
|Member||Role||Monetary outlook 2|
|Jerome Powell||Chairman, Federal Reserve board of governors||Neutral|
|John C. Williams||Vice chairman, Federal Reserve board of governors (bank president, New York)||Dove|
|Lael Brainard||Federal Reserve board of governors||Neutral|
|Randal K. Quarles||Federal Reserve board of governors||Hawk|
|Richard H. Clarida||Federal Reserve board of governors||Neutral|
|Michelle W. Bowman||Federal Reserve board of governors||Neutral|
|Unfilled||Federal Reserve board of governors|
|James Bullard||Bank president, St. Louis||Dove|
|Charles L. Evans||Bank president, Chicago||Neutral|
|Esther L. George||Bank president, Kansas City||Hawk|
|Eric Rosengren||Bank president, Boston||Hawk|
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1 For forex, by number of primary relationships with FX traders (Investment Trends UK Leveraged Trading Report released July 2019)
2 The views of each member are not fixed and are likely to vary over time as a result of changes in the economy and the government’s inflation rate targets. This table illustrates where FOMC members are thought to stand at the time writing (9 October 2019).