The Federal Reserve and the FOMC

The Federal Reserve, or Fed, is the central bank of the United States. Its decisions on interest rates and its balance sheet influence borrowing costs worldwide, the value of the dollar and the prices of stocks, bonds, gold and crypto. Monetary policy is set by the Federal Open Market Committee (FOMC), which meets eight times a year. FOMC announcements and the Fed Chair's press conferences are among the most closely watched events in global markets.

Structure of the Fed#

The Fed's mandate#

Congress gave the Fed a dual mandate: maximum employment and stable prices. The Fed defines price stability as 2% inflation, measured by the PCE price index. See CPI and PCE and Employment Data and Non-Farm Payrolls.

The federal funds rate#

The FOMC sets a target range for the federal funds rate, the rate banks charge each other for overnight loans of reserves, such as 4.25% to 4.50%. The Fed steers market rates into that range mainly using the interest it pays on reserve balances and its overnight reverse repo facility.

How an FOMC meeting works#

The dot plot#

The dot plot shows where each FOMC participant thinks the federal funds rate should be at the end of the next few years and in the longer run. The median dot is widely reported. Markets compare it with futures pricing; a gap often moves markets.

Balance sheet policy#

The Fed's balance sheet grew from about $900 billion before 2008 to nearly $9 trillion in 2022 through quantitative easing. It then began quantitative tightening, letting bonds mature without reinvesting. Balance sheet decisions affect long term yields and market liquidity. See Quantitative Easing and Tightening.

Fed communication#

Between meetings, Fed officials give speeches and interviews. A "blackout period" starts the second Saturday before each meeting and ends the day after, during which officials do not discuss policy publicly. Major annual events include the Jackson Hole symposium in late August, where Chairs have often signalled policy shifts.

Trading Fed days#

1. Know market expectations using tools such as CME FedWatch.
2. Expect two volatility bursts: at 2:00 p.m. and during the 2:30 p.m. press conference.
3. Read statement changes line by line against the prior statement.
4. Watch two year yields and the dollar for the market's verdict.
5. Reduce size or wait if not trading the event deliberately. See News Trading.

Frequently asked questions#

What is the FOMC?#

The Federal Open Market Committee, the Fed's monetary policy committee, which sets the federal funds rate target and balance sheet policy.

How often does the FOMC meet?#

Eight scheduled times a year, about every six weeks, with emergency meetings possible.

What is the dot plot?#

A chart showing each FOMC participant's projection for the federal funds rate at the end of upcoming years and in the longer run.

Next, learn about Europe's and Japan's central banks in The ECB and the BOJ.

Sources#

• Federal Reserve, FOMC