Understand details about the FOMC meeting
You’ve probably heard about the FOMC, especially in news related to the US economy or interest rate decisions. There are some details that you need to pay attention to in order to better understand this subject.
But what is this FOMC, after all? And why are its meetings closely followed by economists, investors and governments around the world? Read on to the end!
What is the FOMC?
FOMC stands for Federal Open Market Committee. It is part of the Federal Reserve System, the central bank of the United States, and its main role is to set the country’s monetary policy, especially focusing on the basic interest rate known as the Federal Funds Rate.
The committee is composed of 12 members: the seven governors of the Federal Reserve Board (the Fed’s main board), the president of the Federal Reserve Bank of New York, and four of the other 11 regional Federal Reserve Bank presidents, who rotate in annual terms.
What is the FOMC for?
The FOMC has a clear goal: to promote economic stability in the United States. To achieve this, it makes decisions that directly influence:
- Inflation;
- Employment;
- Economic growth;
- The level of interest rates.
The most well-known tool the FOMC uses is control of the basic interest rate. When the economy is overheating and inflation starts to rise, the FOMC may raise interest rates to cool down consumption and investment.
In times of recession or crisis, the committee may cut interest rates to stimulate the economy, making credit more accessible and encouraging spending.
In addition, the FOMC also operates through open market operations, buying or selling government securities to adjust the amount of money circulating in the economy.
When do FOMC meetings take place?
The FOMC holds eight regular meetings per year, usually about six weeks apart.
In these meetings, members analyze economic data, such as GDP growth, unemployment, inflation, consumption, and production, and decide whether to change interest rates or maintain the current policy.
At the end of each meeting, an official statement is released, known as the “FOMC statement”, which summarizes the committee’s view of the economy and announces its decisions.
In four of the eight meetings, the chair of the Federal Reserve also holds a press conference, giving even more weight to the communications.
Why does the FOMC affect the entire world?
Although its decisions concern the U.S. economy, FOMC meetings have a global impact. This is because the dollar is the main currency in international trade, and many countries hold reserves in dollars or have debts tied to the U.S. currency.
If the FOMC raises interest rates in the United States, investments become more attractive there, which may draw capital away from emerging countries like Brazil, affecting exchange rates, inflation, and the cost of credit.
On the other hand, when the Fed cuts interest rates, it tends to inject more dollars into the market, benefiting countries that rely on foreign investment.
Moreover, investors around the world watch for signals from the FOMC to adjust their asset portfolios, which can lead to volatility in global financial markets.
How to interpret FOMC signals?
To interpret FOMC signals, it’s important to focus on three main elements: the decision on interest rates, the tone of the official statement.
Which reveals whether the committee is adopting a more aggressive (hawkish) or accommodating (dovish) stance, and the economic projections along with the Fed Chair’s speech, which offer insights into the likely direction of future monetary policy.
FOMC meetings are much more than technical gatherings. They are key events for the global economy, as they set the direction of monetary policy in the world’s largest economy.
Understanding how the FOMC works and why its decisions matter can help both investors and the general public grasp market movements and the indirect effects these policies may have on their finances, even if they live outside the United States.