By Cameron Swindler, Associate Financial Advisor
Over the past 2 years, the Federal Reserve has been the subject of a lot of media attention. As interest rates reached a seventeen-year high in attempts to combat soaring, post-Covid inflation, the public has had their eyes keenly pinned to every move the Fed makes. But why exactly is that and how does it all affect your investments?
One of the most important entities within the United States Federal Reserve or Central Bank, is the Federal Open Market Committee (FOMC). The FOMC is composed of five Federal Reserve Bank presidents and seven, president-appointed Governors which includes the current Chair, Jerome Powell. These twelve members of the FOMC meet eight times a year to discuss the health of the U.S. economy and vote on how best they can improve it.
The primary aim of the FOMC is to manage the nation’s monetary policy; the policy whose main concern is to guide the country’s money supply and balance inflation and unemployment. One of the methods that the FOMC uses to enact its monetary policy is by setting the Federal Funds Rate. This is the interest rate that has made headlines all year.
The Federal Funds Rate (FFR) is the interest rate that commercial banks will charge each other when they need to borrow money overnight to meet the reserve requirements. It is one of the most frequently used and shortest-term interest rates for depository and lending institutions. Thus, the FFR acts as a baseline rate on financial products across the economy, including many of your investments.
If you look at the bond market, you will see that short-term debt securities issued by the U.S. Treasury, tend to follow the Federal Funds Rate closely. For longer-term U.S. securities like Treasury Bonds or Notes, interest rates are partially determined by speculating on how long the FOMC will maintain a given Fed Funds Rate or if they will increase or decrease it. Furthermore, when corporations issue bonds they will often look at the rates of U.S. securities with equivalent maturity lengths. However, the rates of bonds aren’t the only interest rates affected by the FFR.
The interest rates on many of the loans offered by banks such as auto loans, mortgages, and business loans, have a direct relationship to the FFR. Thus, the Fed Funds Rate can have a significant impact on the ability of consumers and businesses to borrow money and the ability of companies to grow. This is why you will see the price of stocks react almost instantaneously to the FOMC announcing the outcomes of their meeting.
This upcoming year will be a challenging one for the Federal Open Market Committee. With inflation still above the Federal Reserve’s 2% target rate and concerns about a possible recession lingering, analysts’ predictions on when it will be appropriate to lower the Federal Funds Rate vary drastically. Furthermore, with a rapidly approaching election this November, Jerome Powell and the FOMC may receive pressure from the President to lower the FFR sooner to boost the economy. No matter the decision made regarding the Federal Funds Rate, each meeting of the FOMC in 2024 will be the subject of much speculation and scrutiny.
If you would like to know how any changes in the FFR may affect your borrowing ability or would like advice on how to prepare your investment portfolio, feel free to contact us via phone, email, or schedule an initial consultation online.