I've always liked finance and I always found ways to learn new things about finance and money. This Federal Open Market Committee (FOMC) statement release has always been something that affected the markets and caused massive volatility on news days. I've always seen traders post their massive gains (or massive losses) on these days even before I started trading forex myself and it got me wondering what it really was. This statement causes massive movement on all pairs tied to the USD including crypto, and you can evidently see the consequence on yesterday's short-lived spikes of volatility in the crypto market.
What is the Federal Open Market Committee (FOMC)?
The Federal Open Market Committee (FOMC) is a group of twelve individuals who meet eight times a year to discuss the economic outlook and set monetary policy. The FOMC includes the seven members of the Board of Governors of the Federal Reserve System and five Reserve Bank presidents.
The FOMC’s primary objective is to promote maximum employment and price stability. After assessing current conditions and considering potential risks to future economic growth, the Committee sets a target range for the federal funds rate–the overnight lending rate between banks. The federal funds rate indirectly affects other interest rates, such as those for mortgages, credit cards, and home equity lines of credit. By making these loans more or less expensive, the FOMC influences household and business spending decisions, which in turn affect inflation and employment.
In December 2015, at its final meeting of the year, the FOMC raised its target range for the federal funds rate by 0.25 percentage points–from 0.25% to 0.50%. This increase marked only the second time that the FOMC had raised rates since 2006; it signaled growing confidence in both U.S. economic growth prospects and inflation moving back toward our 2% goal over time.
Some people worry that as rates rise, consumers will spend less on items like cars or houses–and that this could lead to job losses down the road. However, an extensive body of research indicates that interest rate increases have only increased spending.
Source: Pexels
What was the recent FOMC announcement?
The FOMC recently announced that they would be hiking rates by 75 basis points or 0.75 percentage points. This announcement has caused quite a stir, with many people wondering if this will cause consumer prices to rise.
However, it's important to remember that the FOMC does not control consumer prices directly. Rather, their actions can influence inflationary pressure in the economy. So, while the recent announcement may put upward pressure on prices, it's unlikely to cause them to skyrocket.
Moreover, the FOMC's decision to raise rates is based on their assessment of the economy and their belief that inflation will remain relatively low. So, while there may be some price increases in the short term, it's unlikely that they will be sustained over the long term.
How will this affect consumer prices?
When the Federal Open Market Committee (FOMC) raises interest rates, it put upward pressure on consumer prices. But how much of an impact will this have on household budgets?
On the one hand, higher interest rates mean that consumers will have to pay more for loans and credit products. This includes everything from mortgages to car loans to credit cards. And as rates rise, so do monthly payments.
On the other hand, the FOMC rate hike also signals confidence in the economy. This could lead to more spending by businesses and consumers, which would help boost economic growth. And as the economy grows, wages tend to rise as well. So while consumers may have to pay more for borrowing, they may also see their incomes increase.
In the end, it's hard to say exactly how much of an impact the FOMC rate hike will have on consumer prices. But it's important to remember that higher interest rates are not necessarily a bad thing for households. In fact, they can be a sign of a strong economy that is creating jobs and raising wages and that is we we have seen the USD doing so well against other currencies pairs for a while now.
Check out my recent posts:
Written by @gamsam
All images used are taken by me and copyright free
