The FOMC is one of the macroeconomic indicators that every investor should understand and monitor. It is a powerful unit in the global financial system. Therefore it has a significant impact on the behavior of investors and, thus – on the general sentiment in the markets. So let’s find out more about the FOMC and its impact on global markets.
Table of contents:
What is the FOMC?
The acronym FOMC stands for Federal Open Market Committee (https://www.federalreserve.gov/monetarypolicy/fomc.htm) and refers to one of the policy-making bodies of the Fed (Federal Reserve). Congress gave the Federal Open Market Committee (FOMC) a legal mandate to ensure full employment, stable prices, and low long-term interest rates. The Committee tries to make its decisions about monetary policy clear to the public. This helps businesses and households make better decisions, reduces economic and financial uncertainty, improves monetary policy, and encourages openness and responsibility in a democratic setting.
The Committee consists of seven members of the Board of Governors of the Federal Reserve System (the “Board”) and five presidents or first vice presidents of Federal Reserve Banks serving as representatives of the Federal Reserve Banks. The boards of directors of the Federal Reserve Banks elect these representatives and one alternate for each. The Committee chooses a Chairman and a Vice Chairman from among its members at its first meeting of the year. In the absence of the Chairman, the Vice Chairman shall preside at all meetings and perform such other tasks as the Committee may from time to time assign.
FOMC and its functions in monetary policy
First of all, the FOMC sets monetary policy in the United States. The FOMC’s long-term goals are:
- promoting maximum employment,
- maintaining stable prices,
- controlling long-term interest rates.
FOMC members set a target federal funds rate to achieve the aforementioned goals. It is the interest rate that banks charge each other for overnight loans.
How Often Does the FOMC Meet?
The FOMC meets about eight times a year. During regular meetings, the body members discuss economic conditions and determine the need to adjust the federal funds rate.
The body makes decisions based on various economic indicators, such as inflation, employment, and economic growth. If the FOMC decides that inflation is rising too fast, it may raise the federal funds rate. In this way, he wants to slow down the economy and reduce inflationary pressure. Conversely, if the FOMC decides that economic growth is too slow, it may lower the federal funds rate. This is to encourage borrowing and stimulate the economy.
Impact of the FOMC on the Global Economy
The ability to shape the ill-fated fund’s rate greatly impacts the FOMC on the global economy and market behavior. The FOMC indirectly affects other economic interest rates by raising or lowering the rate.
FOMC Raises Installments – What Then?
For example, raising the federal funds rate may cause other interest rates to rise. I mean primarily interest rates on mortgages and credit cards. As a result, it can be more expensive to lend money to consumers and businesses. As a result, this may slow down economic growth.
FOMC Lowers Installments. What Happens Then?
This mechanism also works the other way around. Lowering the FMC’s deferral rates often entails a decrease in the interest rates in the banks. Consumers and businesses can borrow money more cheaply, an important economic growth stimulator.
FOMC And Stock Markets
(FOMC) and its impact on global markets can also be seen in the case of company shares. When the FOMC raises interest rates, it can cause stock prices to fall and often plummet. The reason? Higher interest rates make it more expensive for companies to borrow money. Conversely, after an interest rate cut, there is often a marked increase in stock prices. The reason is obvious: lower interest rates mean cheaper loans for businesses.
The Impact of the FOMC on the Forex Markets
FOMC decisions can also significantly impact the Forex markets, as the US dollar is the world’s reserve currency. Any moves in US monetary policy affect the value of the dollar and the exchange rates of other currencies.
The way it works is that higher interest rates tend to make the dollar stronger. Higher interest rates make American investments more attractive to foreign investors. However, this stick has two ends. The other end is the fall in the value of other currencies traded in Forex, which causes higher export costs and reduced economic growth in other countries.
In turn, the FOMC weakens the US currency by lowering interest rates. Due to lower interest rates, investments in the US are less attractive to foreign investors. Instead, the value of other currencies increases, making exports cheaper and stimulating economic growth.
FOMC And Its Impact On Global Markets: A Summary
The FOMC is the Federal Open Market Committee, one of the policy–making bodies of the Federal Reserve. The FOMC is responsible for setting the federal funds rate, and its decisions can significantly impact the US and global economy and stock and Forex markets. The FOMC meets about eight times yearly to discuss economic conditions and adjust the rate as needed.