Federal Open Market Committee Effect on Stock Market

By November 21, 2016 Newsletter No Comments

The FOMC (Federal Open Market Committee) schedules eight meetings per year in Washington D.C. , one about every six weeks. Currently FOMC (Federal Open Market Committee)  meeting is being held on July 31st-August 1st. As a trader it is important to know when FOMC is meeting and how Federal Open Market Committee Effect on Stock Market and the historical performance of stock market on the day of FOMC(Federal Open Market Committee) 

The meetings are generally one-day or two-day events, with the two-day meetings providing more time to discuss a special topic. A typical one-day meeting begins on Tuesday at 8:30 a..m. and ends between 1:00 and 2:00 p.m. Two-day meetings usually begin on the afternoon of the first day, typically a Tuesday afternoon, andend between noon and 2:00 p.m. on the second day.

Federal Open Market Committee federal open market committee Federal Open Market Committee Effect on Stock Market FMC

Around the table in the Federal Reserve Board’s headquarters sit all 19 FOMC participants (seven Governors and 12 Reserve Bank presidents) as well as select staff and economists from the Board and the Reserve Banks. Because of the nature of the discussions, attendance is restricted.

The objective at each meeting is to set the Committee’s target for the federal funds rate — the interest rate at which banks lend to each other overnight — at a level that will support the two key objectives of U.S. monetary policy: price stability and maximum sustainable economic growth. The meeting’s agenda follows a structured and logical process that results in well-informed and thoroughly deliberated decisions on the future course of monetary policy. 

The meeting begins with a report from the manager of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York, who is responsible for keeping the federal funds rate close to the target level set by the FOMC. The manager explains how well the Open Market Trading Desk has done in hitting the target level since the last FOMC meeting and discusses recent developments in the financial and foreign exchange markets.

Up next is the Federal Reserve Board’s director of the Division of Research and Statistics, along with the director of the Division of International Finance. They review the Board staff’s outlook for the U.S. economy and foreign economies. This detailed forecast is circulated the week before the meeting to FOMC members in what is called the “Greenbook” — named for its green cover in the days when it was a printed document.

Then the meeting progresses to the first of two “go-rounds,” which are the core of FOMC meetings. During the first go-round, all of the Fed Governors and Reserve Bank presidents discuss how they see economic and financial conditions. The Reserve Bank presidents speak about conditions in their Districts, as well as offering their views on national economic conditions.

The data and information discussed vary by region and therefore spotlight a wide range of industries. For example, one would expect the review of regional conditions in the San Francisco District to lend insight into the tech sector of Silicon Valley. The Chicago District covers a region heavily dependent on manufacturing and automobiles. Philadelphia’s District has become much more diverse and representative of the national economy, so it tends to reflect what is happening across a variety of sectors.

This first go-round covers valuable information about economic activity throughout the country, measured in hard data and recent anecdotal information, as well as the analysis and interpretation conveyed by the policymakers sitting around the table. This is a key way in which each region of the U.S. has input into the making of national monetary policy. This portion of the meeting concludes with the FOMC (Federal Open Market Committee)  Chairman summarizing the discussion and providing the Chairman’s own view of the economy.

At this point, the policy discussion begins with the Federal Reserve Board’s director of the Division of Monetary Affairs, who outlines the Committee’s various policy options. The policymakers receive these options usually by the Friday before the meeting in the“Bluebook,” again named for its cover’s color when originally printed.

The outlook options could include no change, an increase, or a decrease in the federal funds rate target. Each option is described, along with a clear rationale, the pros and cons, and some alternatives for how the Committee could explain its decision in a public statement to be released that afternoon.

Then, there is a second go-round. The Reserve Bank presidents and Governors each make the best case for the policy alternative they prefer, given current economic conditions and their personal outlook for the economy. They also comment on how they think the statement explaining the decision should be worded.

At the end of this policy go-round, the Chairman summarizes a proposal for action based on the Committee’s discussion, as well as a proposed statement to explain the policy decision. The Fed Governors and presidents then get a chance to question or comment on the Chairman’s proposed approach. Once a motion for a decision is on the table, the Committee tries to come to a consensus through its deliberations. Although the final decision is most often one that all can support, there are times when some differences of opinion may remain, and voting members may dissent.

At the end of the policy discussion, all seven of the Fed Governors and the five voting Reserve Bank presidents cast a formal vote on the proposed decision and the wording of the statement.

After the vote has been taken, the FOMC (Federal Open Market Committee) publicly announces its policy decision at 2:15 p.m. The announcement includes the federal funds rate target, the statement explaining its actions, and the vote tally, including the names of the voters and the preferred action of those who dissented.

In addition, the FOMC (Federal Open Market Committee) releases its official minutes three weeks after each meeting. The minutes include a more complete explanation of the views expressed, which allows the public to get a better sense of the range of views within the FOMC (Federal Open Market Committee)  and promotes awareness and understanding of how monetary policy is made.

Historical Performance of Market on FOMC Day 

The stock market’s performance on FED days has been extremely strong. The average performance of S&P on FED days has been0.70% to the upside and 69% of the time stock market goes up. Out of the last four FED days in the year 2012 3 days have shown positive gains while the last one on June 20th brought S&P down0.17%.

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