All participants—the Board of Governors and all 12 Reserve Bank presidents—share their views on the country’s economic stance and converse on the monetary policy that would be most beneficial for the country. After much deliberation by all participants, only designated FOMC members get to vote on a policy that they consider appropriate for the period. Value stocks have historically outperformed growth stocks when interest rates are high, but that trend reversed in 2024 as investors anticipate a Fed pivot to rate cuts in the second half of the year.
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“I do think it’s really a question of keeping policy at the current rate for longer than had been thought,” he said. Investors are hoping the market can continue its bullish momentum in June as the S&P 500 enters a three-month stretch that has historically been one of the best periods of the year for stocks. Investors can already earn 5% or higher in online savings accounts heading into June, and those interest rates will likely remain elevated for at least the next several months. While the economic outlook remains uncertain, there are reasons for investors to be optimistic in June and beyond. He says high interest rates are weighing on consumer durable goods spending and multifamily residential investment. On Jan. 30, 2024, the FOMC reaffirmed its “Statement of Longer-Run Goals and Monetary Policy Strategy.”
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The Vanguard Value ETF (VTV) has generated a total return of just 6.3% year-to-date, while the Vanguard Growth ETF (VUG) has generated a total return of 14.7%. “Markets are convinced that U.S. large cap companies will see many years (not just one) of improving earnings. Earnings for 2024 only have to come through slightly better than last year, and nothing occurs on the macro side (economic growth, geopolitics) to derail further earnings growth in 2025 and 2026,” Colas says.
Federal Open Market Committee announces its tentative meeting schedule for 2025 and 2026
Securities bought by the FOMC are deposited in the Fed’s System Open Market Account (SOMA), which consists of a domestic and a foreign portfolio. Treasuries and federal agency securities, while the foreign portfolio holds investments denominated in euros and Japanese yen. The president of the Federal Reserve Bank of New York serves continuously while the presidents of the others serve one-year terms on a three-year rotating schedule (except for Cleveland and Chicago, which rotate on a two-year basis). The S&P 500 has also historically performed very well in the second half of election years under a first-term president, such as current President Joe Biden.
- At subsequent meetings, the committee kept the target rate at the same level and confirmed the rate as of the last meeting, which was on June 12, 2024.
- The 12 members of the FOMC meet eight times a year to discuss whether there should be any changes to near-term monetary policy.
- High interest rates increase borrowing costs for consumers and corporations, weighing on economic growth and profitability.
- Through its decisions, it sets the Fed’s short-term objective for purchasing and selling securities, which is the target level of the fed funds rate, which influences other interest rates.
- The interaction of all of the Fed’s policy tools determines the federal funds rate or the rate at which depository institutions lend their balances at the Federal Reserve to each other on an overnight basis.
- Because monetary policy determines the inflation rate over the long term, the FOMC can specify a longer-run goal for inflation.
Federal Open Market Committee reaffirms its “Statement on Longer-Run Goals and Monetary Policy Strategy”
In May, the S&P 500 gained 4.2% despite concerns over slowing economic growth, weakening U.S. consumer sentiment and the possibility of stagflation ahead. The S&P 500 is up 10% year-to-date as investors have shrugged off mixed economic data and now anticipate lower inflation, earnings growth acceleration and interest rate cuts in the second half of 2024. At the July 2023 FOMC meeting, the committee raised the fed funds rate to a target between 5.25% and 5.50%. At subsequent meetings, the committee kept the target rate at the same level and confirmed the rate as of the last meeting, which was on June 12, 2024. The 12 members of the FOMC meet eight times a year to discuss whether there should be any changes to near-term monetary policy. A vote to change policy would result in either buying or selling U.S. government securities on the open market to promote the healthy growth of the national economy.
The FOMC can hold these securities until maturity or sell them when they see fit, as granted by the Federal Reserve Act of 1913 and the Monetary Control Act of 1980. A percentage of the Fed’s SOMA holdings are held in each of the 12 regional Reserve Banks; however, the Federal Reserve Bank of New York executes all of the Fed’s open market transactions.
High interest rates increase borrowing costs for consumers and corporations, weighing on economic growth and profitability. For over a year, economists and investors have been fearful that elevated interest rates and tight monetary policies could tip the U.S. economy into a recession. U.S. consumers seem healthy for now, but the Fed is reaching a critical point in its battle against inflation. “The downward revision to economic growth as well as smaller downward revisions to inflation make the Fed a little more likely to start reducing interest rates by September,” Adams says.
The Federal Open Market Committee is responsible for directing monetary policy through open market operations. The group is a 12-member group that is the primary committee of the Fed affecting monetary policy. Through its decisions, it sets the Fed’s short-term objective for purchasing and selling securities, which is the target level of the fed funds rate, which influences other interest rates. The Federal Open Market Committee is the division of the Federal Reserve that sets monetary policy by managing open market operations. The FOMC does this to either contract or expand the economy, depending on current market conditions.
He anticipates the FOMC will opt not to cut interest rates for most—if not all—of 2024 but says a delayed pivot to rate cuts may not derail the bull market rally. The next couple of months could determine whether the FOMC can navigate a so-called soft landing for the U.S. economy without tipping it into a recession. Summer election-year stock market strength has historically continued through August before markets tend to cool in September and October leading up to Election Day. “We have long been of the belief that it is the economy that is most important, and not lower interest rates for the sake of propping up stock prices,” Zaccarelli says. “A cooler economy is limiting businesses’ ability to raise prices, which will help slow inflation in the second half of the year,” Adams says. In his speech, Powell said it is unlikely the Fed will need to raise interest rates further but the appropriate path forward will instead be to continue to hold interest rates at current levels for an extended period of time.
Committee members are typically categorized as hawks favoring tighter monetary policies, doves who favor stimulus, or centrists/moderates who are somewhere in between. This statement is based on the FOMC’s commitment to fulfilling a statutory mandate from Congress to promote maximum employment, stable prices, and moderate long-term interest rates. Because monetary policy determines the inflation rate over the long term, the FOMC can specify a longer-run goal for inflation. In the statement, the FOMC reaffirmed its analysis that a 2% target inflation rate was the rate most consistent with its statutory mandate. The Federal Reserve possesses the tools necessary to increase or decrease the money supply. This is done through OMOs, adjusting the discount rate, and setting bank reserve requirements.
The Fed’s Board of Governors is in charge of setting the discount rate and reserve requirements, while the FOMC is specifically in charge of OMOs, which entails buying and selling government securities. For example, to tighten the money supply and decrease the amount of money available in the banking system, the Fed would offer government securities for sale. The interaction of all of the Fed’s policy tools determines the federal funds rate or the rate at which depository institutions lend their balances at the Federal Reserve to each other on an overnight basis. The federal funds rate, in turn, directly influences other short-term rates and indirectly influences long-term interest rates; foreign exchange rates, and the supply of credit and demand for investment, employment, and economic output. Bill Adams, chief economist for Comerica Bank, says the recently revised first-quarter U.S. gross domestic product, or GDP, growth estimate of just 1.3% suggests the Fed’s restrictive monetary policy measures are having a definitive impact on the economy.
Fortunately, S&P 500 companies have reported better-than-expected first-quarter earnings growth of 6% year-over-year, and they have remained resilient in a difficult inflationary environment. In fact, the S&P 500 is on track for its best quarter of earnings growth since the first quarter of 2022. The FOMC has eight regularly scheduled meetings each year, but they can meet more often if the need should arise. The meetings are not held in public and are therefore the subject of much speculation on Wall Street, as analysts attempt to predict whether the Fed will tighten or loosen the money supply with a resulting increase or decrease in interest rates. Adam Turnquist, chief technical strategist for LPL Financial, says historical market performance since 1950 suggests there’s no good reason for investors to “sell in May and go away” this year.
The FOMC has maintained its target fed funds interest rate range at between 5.25% and 5.5% since July 2023, its highest target range since 2001. The S&P 500 has resumed its march higher as strong first quarter earnings numbers have helped ease investor fears about inflation and a potentially delayed Federal Reserve pivot to interest rate cuts. The FOMC is a committee within the Fed, the Federal Open Market Committee, and is responsible only for open market operations.
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy in the United States by directing open market operations (OMOs). The committee is made up of 12 members, including seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents, who serve on a rotating basis. The bond market is currently pricing in a 98.7% chance the Fed will maintain its current fed funds target rate range of between 5.25% and 5.5% at its June meeting, according to CME Group. During the meeting, members discuss developments in the local and global financial markets, as well as economic and financial forecasts.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says investors shouldn’t be too focused on the interest rate outlook that they lose sight of what truly matters—the economy. The U.S. Treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. The New York Fed’s recession probability model suggests there is still a 50% chance of a U.S. recession sometime within the next 12 months. When it is reported in the news that the Fed changed interest rates, it is the result of the FOMC’s regular meetings. Wayne Duggan has a decade of experience covering breaking market news and providing analysis and commentary related to popular stocks.