The significance of FOMC meetings on global markets

What is the Federal Open Market Committee (FOMC)?

The Federal Reserve is considered one of the most important central banks globally, given the role of the US dollar as a reserve currency. Consequently, any Federal Reserve meeting has the potential to impact the movements of the US dollar.

The Federal Reserve was established in 1913 with the aim of regulating the financial sector. Its goal is to promote financial stability and it’s responsible for the strength of the banking sector and the country's monetary policy.

The FOMC is a special committee affiliated with the Federal Reserve, chaired by the Bank's governor. Its role is to analyse the economy and adjust monetary policy in a way that supports the currency. The bank holds eight meetings per year to determine the path of monetary policy and interest rates, which directly affect the value of the US dollar.

The FOMC consists of twelve members: the seven members of the Board of Governors of the Federal Reserve System and the presidents of the remaining Reserve Banks, with the president of the Federal Reserve Bank of New York serving on a permanent basis.

Types of monetary policies available to the Federal Reserve

Monetary policy means the actions the Federal Reserve takes to influence the availability and cost of money and credit and, thereby, help to achieve the economic goals set for the nation.

Expansionary Monetary Policy: The Federal Reserve adopts this policy when inflation rates are low and economic growth is sluggish. In such cases, the central bank reduces interest rates to support investments, spending, and ultimately stimulate economic growth.

The objective is to incentivise people to shift their savings into investments and encourage consumption. Another tool used is quantitative easing, where the Federal Reserve creates money out of thin air and purchases assets such as Exchange-Traded Funds (ETFs) and government bonds. The aim of quantitative easing is to ensure sufficient liquidity in the market. Other tools at the disposal of the FOMC include money creation and direct lending to companies.

Tightening Monetary Policy: This monetary policy has been followed by the Federal Reserve since 2022 in response to excessive inflation. The Federal Reserve has moved towards ending quantitative easing programs to withdraw liquidity from the market and has raised interest rates to control spending and consumption rates.

The impact of Federal Reserve's decision on global market movements

The FOMC is the most important committee in the financial market and its meeting is one of the most anticipated events in global markets. Additionally, it’s the only committee that has the authority to set interest rates and engage in money printing through quantitative easing programs. Therefore, any meeting of the committee can cause significant movements in global markets.

The meetings of the FOMC are times of volatility because any changes in interest rates on federal funds can impact a range of economic variables such as short-term interest rates, foreign exchange rates, long-term interest rates, labour output, commodity prices, and bond yields.

However, global markets are affected not only by the interest rate decision itself but also by the tone of the Federal Reserve's accompanying statement. The tone directly influences the movements of the US dollar. If the Federal Reserve adopts a more hawkish tone, the US dollar tends to rise. Conversely, if the Federal Reserve becomes more dovish, it can negatively impact stocks as companies prefer low interest rates, which enhance investments, spending, sales, and profits.

Federal Reserve movements through 2023

Since the beginning of 2023, the Federal Reserve has emphasized the need to continue the pace of monetary tightening to control inflation. After about a year and a half, US interest rates reached 5.50%, raising the cost of borrowing for households and helping to control inflation, which reached its highest levels in 40 years.

Having achieved some control over inflation, the Federal Reserve has adopted a new policy of not rushing the pace of interest rate hikes.

For the first time since the beginning of 2022, the bank announced a rate hold at the June meeting. Despite raising rates again at the July meeting, most expectations now support keeping interest rates at current levels. The bank has shifted towards a policy of continuing to raise interest rates but at a cautious pace.