This monetary policy process becomes most visible through the actions of the FOMC. Members typically meet eight times a year to examine and discuss the economic and financial environment, and whether changes to the Fed’s monetary policy are warranted.
FOMC meetings and the resulting policy statements are watched closely by financial markets around the globe. Even the anticipation of policy changes can affect economic conditions and market performance.
FOMC Sets Rate Policy
During each meeting, the committee decides whether to change the Fed’s target for the federal funds rate, which is an interest rate that banks charge for overnight loans to each other. It’s an important benchmark for short-term interest rates.
The Fed manages the actual federal funds rate around its target in part by buying and selling government securities that make up bank reserves. Buying securities drives the federal funds rate down, while selling sends it higher.
Effects of FOMC Policy Decisions
Federal funds rate moves and other forms of monetary policy are intended to stabilize the U.S. economy by counteracting prevailing economic conditions. This can include:
- Bond purchases for the Fed’s own account (known as quantitative easing).
- Lowering interest rates to stimulate the economy (and fuel inflation) by encouraging borrowing and spending.
- Increasing interest rates to restrict economic growth (and inflation) by increasing borrowing costs and cutting spending.
Changes in interest rate policies can affect your investments, though not always in ways you might expect. The FOMC carefully weighs what impact its policies might have on foreign exchange, import prices, overseas earnings for U.S. companies, growth of emerging markets, and a host of other interest rate-related ramifications.