The Federal Open Market Committee (FOMC) guides U.S. monetary policy, aiming for full employment and stable prices. Its twelve members include the seven Board of Governors, the president of the New York Fed, and four rotating Reserve Bank presidents. Each year, one president from each of four regional groups joins the committee, bringing diverse perspectives to its deliberations. While non-voting, these presidents contribute insights and regional perspectives to the committee's assessment of the economy and policy options. Through ongoing discussions and assessments, the FOMC shapes the nation's economic direction.
The FOMC works with the Federal Reserve Board of Governors to control the four tools of monetary policy: the reserve requirement, open market operations, the discount rate, and interest on excess reserves. At its eight annual meetings, the FOMC establishes a target range for the crucial fed funds rate, setting the overall direction for monetary policy. The Board then complements this by setting the specific rates for the discount window and reserve requirements, further fine-tuning the implementation of the FOMC's decisions.
The FOMC chair is also the chair of the Board of Governors. The current makeup of the board is as follows:
- The chair is Jerome Powell, who was sworn in for a second four-year term on May 23, 2022. He began his first term in this role in Feb. 2018.
- Powell is considered a moderate. The vice-chair of the FOMC is John Williams. He became the President of the Federal Reserve Bank of New York in 2018.
- Other Federal Reserve Board members include Michelle Bowman, Michael Barr, Lisa Cook, Philip Jefferson, and Christopher Waller.5
How FOMC Decisions Influence Monetary Policy In The United States
The FOMC combats unemployment through expansionary monetary policy, boosting economic growth by increasing the money supply and lowering interest rates. However, unchecked growth can fuel inflation, prompting the FOMC to switch to contractionary policy, making money more expensive and slowing the economy. This slowdown puts the brakes on price increases, as businesses struggle to raise prices without losing customers and may even need to offer discounts to attract them. The Committee regulates the economy's temperature by tweaking the fed funds rate target, which affects other interest rates, influencing borrowing costs and the money supply.
Inside an FOMC Meeting
Following their regular meetings, the FOMC releases minutes summarizing their decisions, which often involve changing interest rates as reported in the news. These meetings are the engine driving the Fed's decisions. During the meeting, all participants – the Board of Governors and all 12 Reserve Bank presidents – delve into local and global market developments, analyze economic data, assess market trends, and propose potential policy responses to achieve the nation's economic goals. After extensive deliberation, designated FOMC members cast their votes on the monetary policy they deem most suitable for the current economic circumstances, aiming to strike a balance between economic growth and price stability.
The FOMC makes its decisions about rate adjustments based on key economic indicators that may show signs of inflation, recession, or other issues that can affect sustainable economic growth. The indicators can include measures like:
- Core inflation rate: Core inflation is the change in the costs of goods and services, but it does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. It is most often calculated using the consumer price index (CPI), which is a measure of prices for goods and services.
- Durable goods orders: Durable goods orders is a broad-based monthly survey conducted by the U.S. Census Bureau that measures current industrial activity and is used as an economic indicator by investors.
2024 FOMC Meeting Calendar
During 2024 the Fed has the typical schedule of eight meetings to determine interest rates. Of course, the Fed can adjust monetary policy whenever it chooses. That could happen if 2024 sees unusual economic events. The Fed will announce decisions on interest rates following its two-day meetings ending on:
January 31
March 20
May 1
June 12
July 31
September 18
November 7
December 18
Each decision will be announced on the Fed’s website via a written statement at 2 p.m. ET with a press conference following the announcement. The minutes of each meeting are released three weeks later.
Risk Management and Diversification
Interest rate risk is the potential for loss in the value of an investment due to changes in prevailing interest rates. This risk directly impacts the values of fixed-income securities like bonds, as their prices and interest rates are inversely related. When interest rates rise, bond prices fall, and vice versa. This risk is particularly significant for bond investors, especially those holding long-term fixed-rate bonds, who are more exposed to potential price fluctuations because their investments mature much later.
Similar to other types of risks, the interest rate risk can be mitigated. The most common tools for interest rate mitigation include:
To mitigate interest rate risk's impact on a portfolio, bondholders can either diversify by including assets less affected by rate fluctuations (like equities), or by introducing a mix of short- and long-term bonds within their existing bond portfolio. Two key diversification strategies can help bondholders hedge against interest rate risk: First, incorporating securities like equities, whose value generally moves less in response to rate changes, can provide stability to the portfolio. Second, for a strictly bond-focused portfolio, introducing a mix of short- and long-term bonds can offer protection. Shorter-term bonds are less sensitive to rate fluctuations, while longer-term bonds offer potentially higher returns.
The interest rate risk can also be mitigated through various hedging strategies. Investors can shield their portfolios from the ups and downs of interest rates by using special financial tools called derivatives. You can protect your bond investments from interest rate swings with hedging strategies like swaps, options, and futures and forward rate agreements.
