How does the FOMC affect the global financial markets and what should investors know?

Every time the FOMC holds a meeting, commodities, stocks, gold, and foreign bonds enter a “cautious” state, awaiting judgment from this committee. Because even a small decision by the FOMC has the potential to trigger extreme volatility in global financial markets. This article aims to clarify what the FOMC really is and why investors must closely monitor its movements.

Why does the FOMC influence financial markets?

FOMC (Federal Open Market Committee) is the executive body of the U.S. central bank (FED) consisting of 12 members responsible for setting the monetary policy direction of the United States.

The importance of the FOMC stems from its role as the leader in setting interest rates and liquidity in the entire financial system, especially its control over the FED’s balance sheet, which is valued at $51 trillion. This makes it the largest money market management in the world.

Therefore, when the FOMC adjusts policies, it must issue public statements to ensure smooth market adjustments. Regardless of what the FOMC is, its impact is clearly reflected through changes in interest rates and government bond yields, which are key tools for controlling money flow within the economy.

The goals of the FOMC’s operations

The FOMC is tasked with allocating monetary policy to achieve two main objectives:

First, maintaining price stability by continuously monitoring the Inflation Rate index to prevent excessive inflation that reduces purchasing power.

Second, overseeing the employment market, measured by the U.S. Non-Farm Payroll figures, which indicate how many new jobs are created each month.

These two goals are interconnected because high employment often correlates with higher expenses and inflation. Thus, the FOMC must balance policy adjustments to support employment while controlling inflation simultaneously.

Who are the members of the FOMC?

The FOMC’s policy decisions depend on data and the judgment of each member, making understanding their perspectives important.

The FOMC has a total of 12 members: 7 from the U.S. Federal Reserve Board of Governors, the President of the New York Fed, and 4 others elected from the remaining Federal Reserve Banks. Each member serves a one-year term, with rotations to bring in new members.

As of 2023, the FOMC is led by Chair Jerome H. Powell, with Vice Chair John C. Williams from the New York Fed, and 10 other members from various Federal Reserve Boards and Banks across the country.

However, knowing only the identities of the members is not what investors need to remember. It is their ideological stance and decision-making intent, which are reflected in their votes and statements.

How often does the FOMC meet, and how long does each meeting last?

The FOMC convenes 8 times a year, approximately every six and a half weeks, to regularly assess policy management and monitor new economic data.

Each meeting lasts 2 days, and at the end of the second day, a summary statement is released, usually around 2:00 PM local U.S. time or approximately 02:00 AM Thailand time.

For 2024, the FOMC meeting schedule is set from January 30-31, through December 17-18, totaling 8 meetings. Investors can set alerts in advance to follow the announcements.

The tools used by the FOMC for monetary policy

The FOMC primarily uses Open Market Operations (OMOs) as its main method of implementing policy, with various approaches available:

Purchasing government bonds increases cash in the system. This approach, called Quantitative Easing (QE), is often used to stimulate the economy and promote employment. However, side effects include rising inflation and expanding the FED’s balance sheet.

Selling government bonds is the opposite, removing cash from the system. This policy is used to cool down overheating economies and halt rising inflation. The result is a decline in inflation and a reduction of the FED’s balance sheet.

Adjusting the Fed Funds Rate (FFR) is the most impactful tool. The FFR is the overnight interest rate banks and financial institutions use for borrowing among themselves or from the central bank. When FFR increases, borrowing costs rise, leading to less money entering the economy. Conversely, lowering FFR makes borrowing cheaper, increasing liquidity.

Through these three tools, the FOMC can stabilize the financial system, control liquidity, and promote economic growth and employment.

Reading the Dot Plot to understand future trends

Beyond announcing policy decisions, investors should pay attention to the Dot Plot, a dot chart released alongside each FOMC meeting report.

The Dot Plot shows each member’s view of the interest rate outlook for upcoming meetings. Each dot corresponds to a member’s forecast, and the spread of dots indicates differing opinions among members.

Observing changes in the Dot Plot from one meeting to another helps investors anticipate future policy shifts. Regardless of what the FOMC is, its decision-making style is clearly reflected in the Dot Plot.

What is the FOMC? Understand and recognize

In summary, the FOMC is the highest authority body responsible for U.S. monetary policy. In Thailand, its role is similar to the Monetary Policy Committee (กนง.) of the Bank of Thailand, which manages monetary policy in phases.

The policies enacted by the FOMC do not only impact the U.S. economy but also have broad effects on global financial markets through changes in interest rates and liquidity control in international money markets. Therefore, investors, regardless of asset class or market, must closely monitor FOMC movements to make informed and secure investment decisions.