The Federal Reserve manages US monetary policy, often through changes to interest rates. What else should investors know about the Fed?
The US Federal Reserve, inflation and interest rates have consistently made headlines in recent months.
Recovery from the COVID-19 pandemic has unleashed demand across industries, while global supply chains have been hampered by factors like Russia's war in Ukraine and continued lockdowns in China due to the country's zero-COVID policy.
This global supply and demand imbalance has led to rising prices for a wide range of consumer products, from gas to groceries. The result has been a loss in purchasing power for US consumers as their dollar needs to stretch further.
In economic terms, the US is now steeped in high inflation that's impossible to ignore. According to US Labor Department data, as of August 2022, the country’s annual inflation rate was 8.3 percent. For comparison, the annual rate of inflation was 7 percent for the same period in 2021, and just 1.4 percent for the equivalent time in 2020.
Tackling soaring inflation rates in the US is the job of the country’s central bank, known as the Federal Reserve.
Here the Investing News Network provides investors with insight into the Fed's role in US monetary policy, and answers the question, “Why does the Fed hike interest rates?"
What is the US Federal Reserve?
The Federal Reserve, often referred to as the Fed, is the US central bank and monetary authority. It was established by the Federal Reserve Act in 1913, which gave the Fed responsibility for setting monetary policy in response to the 1907 Banker’s Panic.
“The Panic was caused by a build-up of excessive speculative investment driven by loose monetary policy,” explains Investopedia. “Without a government central bank to fall back on, U.S. financial markets were bailed out from the crisis by personal funds, guarantees, and top financiers and investors, including J.P. Morgan and John D. Rockefeller.”
Although it is an independent government agency, the Fed is accountable to the public and US Congress. The current Fed Chair is Jerome Powell, an investment banker who served as assistant secretary and undersecretary of the Department of the Treasury under former President George H.W. Bush. Powell took the helm at the Fed in 2018.
The Fed has a dual mandate: to achieve stable prices and stable employment. The government agency also provides banking services and is the main regulator of the nation’s banks. In times of economic turmoil, the Fed also acts as a lender of last resort.
It's important to note that while the Fed manages the national monetary policy and regulates the financial system in the US, its actions also have a powerful influence on the global economy.
How does the US Federal Reserve regulate monetary policy?
The Fed regulates monetary policy and the financial system by setting interest rates, as well as influencing money supply and — as it has done recently — boosting the financial markets by making asset purchases worth trillions.
Buying and selling US Treasury bonds to control bank reserves and interest rates is one of the strategies the Fed employs to meet its dual mandate of stable prices and stable employment.
Why does the US Federal Reserve hike or cut interest rates?
For more than a century, the Fed has been tasked with keeping a watchful eye on any structural risk to monetary stability in the US financial system. Rising inflation and high unemployment are two of the biggest threats to monetary stability.
During times of slow economic growth, the Fed lowers interest rates in order to stimulate the economy. Lower interest rates in effect lower the cost of borrowing and investing for both businesses and individuals.
In the face of rising inflation, the Fed raises interest rates in the hopes of reigning in rapidly rising prices by curbing demand. The Fed’s goal is to keep inflation around its target rate of 2 percent. When interest rates are higher, borrowing money becomes more expensive, which ultimately slows consumer spending and curtails corporate growth.
“The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation,” according to Investopedia.
How much has the US Federal Reserve hiked rates in 2022?
The Fed has now raised interest rates by 3 percentage points in 2022.
In an effort to fight inflation, the American central bank has been consistently increasing rates since its March boost of 25 basis points, with its June hike of 75 basis points clocking in as its largest since 1994.
|___FOMC meeting date___||___Rate hike in basis points___||___Target federal funds rate___|
|January 25 to 26||N/A||0 to 0.25 percent|
|March 15 to 16||+25||0.25 to 0.5 percent|
|May 3 to 4||+50||0.75 to 1 percent|
|June 14 to 15||+75||1.5 to 1.75 percent|
|July 26 to 27||+75||2.25 to 2.5 percent|
|September 20 to 21||+75||3 to 3.25 percent|
How many times does the Fed meet each year?
The Federal Open Market Committee (FOMC) is the Fed's monetary policy-making body. The 12 members of the FOMC are: the seven members of the board of governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the 11 reserve bank presidents who rotate through the positions for one year terms.
The FOMC holds eight meetings per year, typically scheduled every seven weeks. According to the Fed's website, during these meetings the FOMC “reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.”
How many more US Federal Reserve meetings this year?
Two more Fed meetings are scheduled for 2022, and market participants will be closely watching these events. The first will run from November 1 to 2, and the second will take place from December 13 to 14.
It's too soon to know what exactly the Fed will do at these remaining meetings, but its September statement gives some clues — in it, the central bank says that it "anticipates that ongoing increases in the target range will be appropriate," adding that it is "strongly committed" to bringing inflation back to its objective of 2 percent.
Speaking at a press conference after the meeting, Powell reiterated those ideas, commenting that the Fed "will keep at it until the job is done." However, he stopped short of projecting what will happen in November and December, saying that the Fed is taking a meeting-by-meeting approach to rate increases.
Don't forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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