The recently concluded Federal Reserve meeting was hotly anticipated. Markets had been looking for more guidance on the Fed’s plan to raise interest rates, and when it will start.
Here’s what to know about the Fed’s decision.
1: What is the FOMC?
The Federal Open Market Committee, or FOMC, is the Fed’s monetary policymaking body. There are twelve members in total.
- Seven members of the Board of Governors of the Federal Reserve System;
- The president of the Federal Reserve Bank of New York;
- Four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
2: What is the FOMC’s objective?
The FOMC’s role is to formulate and implement policies to:
- Keep prices stable
- Encourage economic growth
Essentially, the FOMC manages money supply in the United States.
3: Do they also decide the federal funds rate?
Yes, the FOMC’s primary means of adjusting the stance of monetary policy is by changing its target for the federal funds rate.
4: How many times do they meet in a year?
The FOMC meets 8 times a year, in Washington DC. The next meeting after January will be on March 15, 2022. .
5: What were most market participants expecting for this meeting? Why did the S&P500 fall slightly (-0.2%) after rallying earlier in the day?
Market participants were not expecting significant deviations from what was previously communicated following the December 2021 FOMC meeting.
- Fed’s inflation conditions for liftoff (as communicated in the December statement) has been met. After the two day meeting in January, we saw more reassurance from the Fed that the US economy is doing relatively well: “Economic activity expanded at a robust pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support, and the healthy financial positions of households and businesses.”
- Quantitative Tightening (QT, the opposite of Quantitative Easing), also known as tapering of asset purchases are on track. Chair Powell noted that the economic recovery/expansion stage we are in now is different from previous ones, with “higher inflation, higher growth, a much stronger economy”. These “differences are likely to be reflected in the policy that [the Fed] implement[s]”.
- The committee is largely aligned in longer term inflation expectations but appears less certain that supply-side bottlenecks will fade later in 2022.
- In the Q&A portion, Chair Powell mentioned that “there are many million job openings then there are unemployed people”, stipulating that “there’s quite a bit of room to raise interest rates without threatening the labor market”.
- However, he emphasized that it is important to be “humble and nimble” and that the committee is going to be “led by incoming data and the evolving outlook”.
6: Will we see a rate hike in March?
The Fed has said that a quarter-percentage point rate increase is likely forthcoming. The rate hike will be the first rise since December 2018. Although the post-meeting statement from the FOMC did not provide a specific time, indications are that it could happen as soon as the March meeting.
“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the statement said.
Fed Chair Jerome Powell also indicated that the Fed’s monthly bond purchases are likely to end in March.
7: Are the rate hikes priced in?
Yes, for the most part markets have priced in a hike in March 2022. Expectations are more fluid longer term. We see a range of expectations: from two to three, or even more hikes post March. The consensus view has turned slightly more hawkish but most market participants are expecting four rate hikes in 2022.
8: Was there a new dot plot this time?
The dot plot shows estimates of what the federal funds rate should be. Members of the FOMC each get to place a dot for what they think to be an appropriate midpoint over the next three years and longer. Investors tend to focus on the median dot.
Here’s the FOMC participants’ assessments of appropriate monetary policy, following the December 2021 meeting.
9: When will the FOMC meeting minutes be published?
The FOMC statement has been published following the meeting and you can also view the press conference here.
FOMC meeting minutes will be released three weeks after the meeting.
FOMC statements explain rationale in policy action and convey the outlook for monetary policy going forward. FOMC minutes are released later, but contain a lot more information. This includes the range of Committee members’ views on the policy stance, US economic outlook and near term policy inclinations. The minutes give more information on the diversity of views: From the hawkish members to the dovish members and if any of them had a shift in stance.
10: What should investors do now?
Markets may remain volatile as investors digest the Fed’s comments. However, it pays to stick with your long-term investment plan. When you pull out of the market, you not only realise your losses but also risk missing out on the recovery that follows.
Pullbacks are a normal part of resetting stock valuations and investor expectations. They may even be opportunities to invest in high-quality stocks at more attractive prices.
This article was first published on 25 January 2022 and updated on 27 January 2022.