What is the FOMC Meeting Schedule and Why is it Important?
The Federal Open Market Committee (FOMC) acts as the monetary policy maker to the world’s largest economy – the US.
The FOMC is part of the Federal Reserve system and its twelve members meet eight times a year. Each board member is considered to be an expert in monetary policy and economics.
FOMC meetings are closely analysed by the worldwide media and financial analysts for clues to current and future monetary policy. Although the FOMC focuses on the US economy and monetary policy, the board’s decisions and statements heavily influence other global central banks like the European Central Bank (ECB) and the Bank of England (BoE).
The FOMC’s decisions also take into account global economic events if they impact the US economy. Events that have influenced the FOMC’s decisions include the trade wars and subsequent supply-chain problems between China and the US and the impact of the COVID-19 pandemic on the world economy.
What is the FOMC responsible for?
The US central bank is responsible for gathering a wide range of economic performance benchmarks to decide on interest rate guidance. The main aim is to control price inflation and – during normal economic conditions - keep it at around the level of two percent in order to support price stability in the economy.
This is not always easy, to say the least. During times of uncertainty, prices can behave erratically and the world economy has passed through many crises. The Federal Reserve has a tool kit to handle uncertainty in the local economy.
What is the Federal Funds Rate (FFR)?
One of the main tools is the power to control the FFR, the rate which banks charge for keeping excess cash reserves overnight.
Interest rate guidance impacts on the banking sector’s lending decisions. Low interest rate guidance means that the central bank encourages cash flow into the economy in the form of credit. If excess reserves do not earn much in overnight interest – or even have charges because of negative interest - it is an incentive for the banking sector to increase lending to businesses and households instead in order to generate income.
By the same token, if the Federal Reserve guidance is to raise the FFR, banks would gain more on overnight interest fees. This carries less credit risk for the banking sector but makes borrowing for businesses and households more difficult and expensive.
FOMC interest rate decisions
During the FOMC meetings, the board decides on interest rate guidance. These decisions are closely linked to inflation through the basic economic concepts of supply and demand.
During periods of slow economic growth and low demand for goods and services, interest rate guidance tends to be low to incentivise borrowing, increase cash flow and stimulate demand. This is a dovish stance that is supportive of inflation and the national currency.
When the economy heats up, interest rates tend to be higher to control borrowing, keep prices in check and keep demand from pushing prices too high. This is a hawkish stance and the aim is to constrain inflation and prevent the national currency from becoming too strong.
Another powerful tool in the FOMC’s hands is quantitative easing (QE). When price stability is threatened - as happened during the 2008 sub-prime crisis and subsequent financial crash - the Federal Reserve began buying Treasuries to support the country’s national bonds. Other rounds of quantitative easing happened during the COVID-19 pandemic in 2020/21 when the Federal Reserve had to step in to support the US economy.
Once a disturbance in the economy has passed, the Federal Reserve starts selling off the assets it has built up on its balance sheet in a practice called QE tapering. In parallel, the FOMC starts considering interest rate hikes in line with developments in the inflation rate.
Geopolitics and the FOMC
The effects of high-profile geopolitical events can be part of the FOMC’s decisions. These events can include wars or crises, supply-chain disruptions, major political events such as unrest in countries with significant natural resources or systemic power in the world economy.
The global economic system is now as interlinked as the WorldWideWeb, meaning that a significant geopolitical event in a faraway country can affect the US economy. And if it affects the US economy enough, it will likely be part of the FOMC’s strategic decisions.
Reliable monetary policy is one of the reasons that the USD is widely considered to be a safe-haven asset and US Treasuries maintain their credibility.
Hawks or doves
The financial and banking sectors take their directions from the FOMC’s current stance. During low interest rate periods, the stance is interpreted as dovish and during rising or high interest rate periods, the stance is hawkish. In most cases, a dovish stance means economic woes and is not an indication of the board’s character.
Dovish periods are credit-friendly, meaning that credit is less expensive as it carries lower interest rates and borrowing and investment may intensify. This doesn’t mean that hawkish periods are not credit-friendly, rather that the main intention during dovish periods is to encourage investment, consumer spending and job creation.
Hawkish periods that are characterised by higher interest rate guidance usually indicate that higher inflation is a concern. Higher interest rates constrain borrowing and spending and help to keep inflation in check.
In summary, the FOMC meeting schedule is important because the subsequent announcements influence other central banks, the US banking sector and wider financial sector. The Federal Reserve’s meeting minutes are a gauge of US economic performance and can have a dramatic impact on the Forex markets.
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