If it affects the markets, it affects you and this surely does
Given its importance and relevance, we have created a series of articles to explain the role of the Federal Reserve System within the US economy and how it affects the markets. In this first article we will discuss the FOMC (The Federal Open Market Committee), the monetary policymaking branch of the Federal Reserve System. The aim is to answer questions such as:
What is the FOMC?
Who are its members?
What does it do?
How does it affect the market?
The Federal Reserve System
When talking about the FED, most people are immediately brought to think of just one person, one face. There is always a face.
There is a face above every newspaper article and on every TV news report about the Federal Reserve Bank, the Dollar, the interest rate, quantitative easing and, of course quantitative tightening. That face, more often than not, belongs to the Chair of the Federal Reserve Bank and Chair of the FOMC.
However, the truth is that there is a complicated structure of organizations and people behind the Chair: The Federal Reserve System composed by the Board of Governors, the FOMC and the Federal Reserve Banks.
Under general guidance by the Board of Governors and five Federal Reserve Bank presidents amongst its members, the FOMC is the monetary policymaking body of the Federal Reserve System and it is, albeit arguably, at its center. Its job is to oversee the open market by directly influencing the availability and cost of money and credit in order to achieve the Federal Reserve System’s objective.
Who are the FOMC’s members and when do they meet?
The FOMC (Federal Open Market Committee) is composed of twelve members:
Five Federal Reserve Bank presidents.
The president of The Federal Reserve Bank of New York is a permanent Committee’s member and permanently serves as its Vice Chair. All the remaining eleven presidents attend each FOMC meeting and participate in discussion but, in rotation, only four of them (in addition to the Vice Chair) have the right to vote on policies.
The seven members of the Board of Governors.
The Board of Governors is a Government agency that reports and is accountable to Congress. It oversees all twelve Federal Reserve Banks and provides guidance to the Committee. The Chair of the Board of Governor is always also the Chair of FOMC.
The FOMC holds scheduled meetings eight times every year and around six weeks apart. In addition to these, the Committee also holds unscheduled meetings if and when deemed necessary depending on the economic situation.
What is the FOMC responsible for and what does it vote on?
The Federal Reserve System was created with “just” two objectives in mind: protecting the value of the Dollar and maintaining maximum employment. The Board of Governors, the FOMC and the twelve Federal Reserves Bank all work together towards the achievement of these goals.
The FOMC, in particular, has the job of overseeing open market operations to influence money market conditions and incentivize credit growth while protecting the value of the Dollar.
During each FOMC meeting, the Board of Governors and all twelve Federal Reserve Banks share their views on both the local and the global economic conditions and their financial forecasts. After the discussion and deliberation, the twelve members of the FOMC vote on the issue at hand.
How do FOMC meetings affect the market?
FOMC meetings are normally preceded and followed by particularly high volatility. This is normal if we consider the type of monetary policies that are often discussed and voted upon.
Interest rate policies, for example, can affect the cost of borrowing money which, in turns, can affect prices and investment in all financial markets, employment levels and national production output. Any interest rise is normally immediately followed by lower earnings and stock prices (with the exclusion of the financial sector) whilst it generally takes around a year to affect the rest of the economy.
The FOMC releases minutes of its meetings three weeks after each one although the full transcript is only released five years later.
Every year, four out of the FOMC eight meetings feature a SEP (Summary of Economic Projections) and are followed by the Committee’s Chair.
Traders and investors in all markets pay careful attention to the vast amount of information contained in every press releases, speeches and all other forms of communication by FOMC members between one meeting and another. We suggest you do the same….
… and to help you out, we are preparing more educational content on the FOMC and the Federal Reserve system as a whole. The second article of the series will be out soon; It will talk of the “unemployment rate” and its effect on the economy and the financial markets.
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