Why does the market care about FOMC meetings?
And more importantly, why should you care?
Well, the short answer is that the decisions made by the Fed can influence the economy, can influence business earnings, and, hence, can influence the direction of the markets.
You see, the Fed was created by Congress well over a hundred years ago.
The Federal Reserve’s Role in the Economy
And today, it has two main mandates: the first is to ensure maximum employment and the second is to maintain price stability.
In other words, the Fed’s role is to ensure that inflation remains in check and that unemployment doesn’t get too far out of control for too long.
So then, at regular intervals throughout the year, during these Federal Open Market Committee (or FOMC) meetings, policymakers assess whether they’re doing what’s necessary to stick to their commitment.
Now, there’s only so much that any one institution can do to control what businesses charge for goods or services or whether they’re prepared to keep hiring.
How Interest Rates Affect the Economy
However, the one thing that the Fed does have control over is short-term interest rates.
And so, you likely know that when the interest rate on your credit cards, or your auto loan or your mortgage goes up, your willingness to spend likewise goes down, right?
Well, in a similar way, the Fed sets its policy rate so that it’s more expensive for businesses to borrow when inflation is getting out of control.
And when inflation is stabilizing, and jobless claims are on the rise, then policymakers consider cutting rates to incentivize borrowing and boost economic activity.
Put a different way, it’s all about the way that money flows through the economy.
When the tap is open and money is flowing freely, the economy is typically humming, but inflation tends to take off as well.
Why You Should Pay Attention to FOMC Meetings
Alright, so with all that said, why does the market care about FOMC meetings?
Well, when the Fed begins raising or lowering rates, it’s typically part of a broader trend. Here again, when interest rates are set to fall, businesses could benefit from lower borrowing costs, and potentially lead to increased profitability and therefore support higher stock prices over the long-term.
So then, why should you care about what the Fed is doing?
Well, when the Fed does something in line with market expectations, this often translates into a higher portfolio value for your retirement savings.
What’s more, understanding the Fed’s decisions can help you make better spending choices, especially if you plan to finance a big-ticket purchase like buying a new home.
At the same time, it can also help you determine whether it’s a prudent time to go out and find that new job.
That’s because when the Fed starts cutting rates, it can signal that a potential economic slowdown is underway and suggest that the job market might soon tighten.
So then from this perspective, it’s crucial to approach job changes with caution when the Fed is preparing to cut rates.
Either way, staying on top of the Fed’s latest policy rate decision, and more importantly, understanding why markets respond the way they do, will likely help you make better financial decisions and at the same time, help you make career choices that ultimately set you up for success.