What is the FOMC?

The FOMC or Federal Open Market Committee is responsible for the establishment and implementation of monetary policy of the Federal Reserve. The Committee consists of twelve members – the seven members of the Federal Reserve Board of Governors, the President of the Federal Reserve Bank of New York and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. All Reserve Bank presidents attend FOMC meetings even though some are not designated voting members. The FOMC currently holds eight regularly scheduled meetings, approximately every two months. The remaining 2026 meetings are slated for October 27-28 and December 8-9. In 2027, the meeting schedule looks like this: January 26-27, March 16-17, April 27-28, June 8-9, July 27-28, September 14-15, October 26-27 and December 7-8. At its meetings, the Committee reviews current economic conditions, determines the appropriate posture of monetary policy and considers risks to achieving its dual mandate of encouraging maximum employment and price stability, the latter which is commonly interpreted as controlling inflation with a long-range target of 2.0%.  The fact that inflation has been above 2% for five years is the driving force now behind the recent hawkish turn at the Fed.

Monetary policy, as defined, “are the actions of a central bank (like the Federal Reserve) that determine the size and rate of growth of the money supply, which in turn affects interest rates.”  Monetary policy, which influences both money and credit conditions in the economy, is maintained through actions such as modifying the interest rate charged to commercial banks (the target federal funds rate), buying or selling of government bonds, and changing reserve deposit requirements.  The goal of these actions is to tighten or expand the money supply, depending on the current circumstances and desired outcomes. 

The target federal funds rate, set by the FOMC, is the interest rate at which depository institutions (banks) lend reserve balances to other depository institutions overnight. Reserve balances are amounts held at the Federal Reserve to maintain depository reserve requirements. At its recently concluded September meeting, the FOMC voted to raise the target range of the federal funds rate from 3.5 – 3.75% to 3.75 – 4%. This was the first increase since July 2023 when we saw a rate hike to a range of 5.25 – 5.5%.  The vote on the most recent rate hike was unanimous, and 16 of the 18 officials who submitted projections penciled in at least one more increase in 2026. What does this mean for the US economy?  While changes in the fed rate can impact the entire yield curve, typically we would expect short term consumer lending rates (auto loans and credit cards) to be impacted the most. In contrast, mortgage rates are more likely to react to changing expectations in the outlook for economic growth and inflation. 

The tone of Chairman Warsh’s post-conference remarks were decidedly optimistic. He stated “that economic activity is expanding at a solid pace. Productivity growth is strong, and capital investment is robust. Our decision comes at a time when the American economy appears to be strengthening. I would be hard-pressed to describe financial conditions as restrictive. This view is widely shared by the Committee. So, we have removed a dose of accommodation.”  That all sounds good. However, in our view, there is little evidence of strong consumer demand that needs to be tamped down with higher interest rates. Furthermore, this rate hike cannot and does not address the energy supply side of inflationary pressures resulting from our war with Iran. This action by the Fed suggests that it no longer sees the accompanying energy shock as a disruption to wait out.