The FOMC and the Federal Reserve rate decision

Who decides, and what they decide 

The Federal Open Market Committee is the body inside the Federal Reserve System that sets United States monetary policy. Its voting membership combines the Board of Governors in Washington with the president of the Federal Reserve Bank of New York and a rotating subset of the other regional Reserve Bank presidents. Every regional president attends and speaks at every meeting; only some vote in a given year. The structure is deliberate, and it means the balance of opinion in the room is not the same as the balance of votes on the decision.

What the Committee decides is narrower than the phrase interest rate decision suggests. It sets a target range for the federal funds rate, which is the rate at which depository institutions lend reserve balances to one another overnight. The Committee does not administer that rate directly. It steers the market rate into the range using administered rates it does control, principally the rate paid on reserve balances and the rate at which it will lend against Treasury collateral on an overnight basis. The federal funds rate is therefore a market outcome that policy is aimed at, not a price the Committee publishes.

That single overnight rate anchors the shortest point on the dollar yield curve, and everything longer is priced against expectations of where it will be over the life of the instrument. This is why a decision about an overnight lending rate is treated as consequential for instruments with no overnight component at all.

The meeting calendar 

The Committee holds eight scheduled meetings a year, on dates published roughly a year in advance. Each is a two-day session, with the decision released in the early afternoon Eastern Time on the second day. Four of the eight, spaced roughly quarterly, produce the Summary of Economic Projections. The Chair holds a press conference after every meeting, an arrangement adopted so that no subset of meetings is understood in advance to be the ones where something can happen.

The Committee can also meet unscheduled. Such meetings are convened by conference call, are not on any published calendar, and are announced when a decision is taken rather than before. They are rare, and the fact of one being convened is itself information that no calendar carried.

The four documents a meeting produces 

A meeting is not one event. It is a sequence of publications, arriving at separate moments, each with a different character.

1. The statement, released at the scheduled instant. A short document with a stable structure: an assessment of activity and inflation, the decision itself, the reasoning, and the recorded vote including any dissents by name. Because its wording changes only where the Committee intends it to, the convention among analysts is to read it as a difference against the previous statement rather than as prose.
2. The Summary of Economic Projections, released simultaneously with the statement at four meetings a year. It reports the individual projections of every participant, voting or not, for growth, unemployment, inflation and the appropriate policy rate over the coming years and in the longer run. Its rate panel is the chart commonly called the dot plot.
3. The press conference, beginning shortly after the statement. The Chair reads a prepared statement and then answers questions, and the answers are unscripted. This is where the statement's compressed language is elaborated, and it is a separate event from the decision that preceded it.
4. The minutes, published three weeks after the meeting. A narrative account of the discussion, attributing views to unnamed groupings of participants rather than to individuals, and describing arguments that the statement's few paragraphs could not carry. A full transcript follows, but only after a delay of several years.

What the dot plot is, and what it is not 

Each dot in the projection chart is one participant's view of the appropriate level for the policy rate at the end of a given year, conditional on their own forecast of the economy. The dots are anonymous, they are not attributed to voters as distinct from non-voters, and they are not connected across years into paths, so a reader cannot tell which end-of-year dot belongs to which participant's trajectory.

Three limits follow directly from that construction. The chart is not a commitment, because each dot is conditional on a forecast that will change. It is not a Committee forecast, because it aggregates individual views that were never voted on. And its median is a summary statistic of an anonymous distribution, so a shift in the median can be produced by one or two participants moving without any change in the centre of gravity of the Committee at all. Federal Reserve officials have said all three things in public repeatedly, which has not stopped the median dot being reported as a promise.

The second policy lever: the balance sheet 

The rate decision is not the only decision. The Committee also directs the size and composition of the System Open Market Account, the portfolio of Treasury and agency securities the Federal Reserve holds. Expanding that portfolio by purchasing securities is quantitative easing; allowing it to shrink, typically by letting maturing securities run off rather than reinvesting the proceeds, is quantitative tightening. The instructions governing this are published alongside the statement as a directive to the New York Fed's trading desk.

Balance sheet policy operates on a different part of the curve from the policy rate and on a different timescale. Changes to it are usually announced with advance notice and implemented gradually, which is one reason a meeting that leaves the target range unchanged is not necessarily a meeting at which nothing was decided.

The conventions by which it is read 

Practitioners describe the Committee's posture on a spectrum from hawkish, meaning more concerned with inflation and more inclined toward restrictive policy, to dovish, meaning more concerned with employment and more inclined toward accommodation. The labels are shorthand for a distribution of views and are applied to statements, to individual officials and to whole meetings.

Two further conventions are widespread. The first reads the decision against the pricing already embedded in interest rate futures beforehand, on the reasoning that a widely expected move was priced in advance and therefore carries less new information than an unexpected one. The second treats a dissenting vote as a signal about the range of opinion inside the Committee, since dissents are recorded by name and are historically uncommon.

Why a domestic decision reaches non-US markets 

The dollar is the currency on one side of most foreign exchange turnover, the funding currency for a large share of cross-border credit, and the invoicing currency for most internationally traded commodities. A change in the expected path of dollar interest rates therefore alters an interest rate differential against every other currency at once, changes the cost of dollar funding for borrowers who have no US operations, and re-prices the discount rate applied to future cash flows in equity valuation everywhere. None of that requires any view about what happens next. It is a description of where the dollar sits in the plumbing.

One regional consequence is structural rather than behavioural. Several Gulf currencies are pegged to the dollar, and maintaining a peg constrains the domestic policy rate to track the anchor currency's. In those economies a Federal Reserve decision is transmitted into domestic monetary conditions by the exchange rate regime itself, without any domestic committee choosing it.