In the world of Wall Street, it seems, every few months all eyes are on the Federal Reserve—and with good reason. The decisions by the central bank’s Federal Open Market Committee (FOMC) on interest rates can have major impacts on the U.S. economy and on markets worldwide.
The Federal Reserve is tasked with setting the federal funds interest rate, the benchmark rate at which depository institutions, such as banks and credit unions, lend reserve balances to other depository institutions overnight.
While this interbank borrowing rate might seem to be of little importance to the average investor, that rate plays an important—albeit indirect—role. That’s because the cost and availability of money can impact everything from the interest rates you pay and earn and the availability of credit to perhaps even the price you pay for groceries or your job prospects.
When the FOMC believes that economic activity is slowing, it may reduce interest rates to discourage saving and encourage borrowing and spending. When the committee worries that the economy is in danger of overheating and that inflation may be growing too quickly, it may increase rates to encourage saving. The Fed became known for its interest rate actions during and after the 2008 financial crisis, as well as its other actions, including its purchases of mortgage-backed securities to help stabilize the U.S. housing market.
Yet for all its influence, the Fed has long been shrouded in mystery. Some three decades ago, “the Fed would meet, make a decision about interest rates, not announce it, and financial markets would infer what happened based on what was happening in money markets,” said Dan Sichel, a former senior Fed official who is now a professor of economics at Wellesley College.
The Fed became more open, Sichel said, under the respective tenures of Fed chairs Alan Greenspan and Ben Bernanke.
“Greenspan decided that it was important to communicate more fully with the financial markets and with the public both from a public relations point of view and because he understood that monetary policy can be more effective if financial markets understand what the Fed is doing,” Sichel said.
The Fed’s communications improved further under Bernanke, he said, who introduced, among other things, the famous Fed “dot plot.” (More on that later.)
Here’s a look at some of the key ways the Fed communicates with the public and the markets today.
The FOMC consists of 12 voting members, but its meetings are also attended by a group of regional Reserve Bank presidents who don’t vote but who do contribute to committee discussions (For more on the structure of the FOMC, check out the Fed’s FOMC page).
The committee holds eight regularly-scheduled meetings each year and, after each meeting, releases a statement about three pages long that summarizes how economic conditions changed since its last meeting, describes the committee’s outlook on the economy and states its monetary policy decisions, including investment in mortgage-backed securities and any actions on the key federal funds rate, which affects interest rates throughout the economy.
Four times a year, in conjunction with its regular meetings in March, June, September and December, the FOMC releases several charts summarizing committee members’ and non-voting Reserve Bank presidents’ projections on GDP growth, unemployment rates, inflation and the future federal funds rate. The lattermost chart, known as the dot plot, generally attracts the most attention as market watchers look for signs of possible future interest rate changes.
As its name suggest, the chart consists of dots—one for every FOMC committee member and non-voting Bank president—plotted to show how high or low officials believe the federal funds rate should go in the current year and the two years that follow, as well as where it should be in the “longer run.”
The dot plot is anonymous, as are the other projections. That means the presence of five dots in a 0.5 to 1 percent range tells you that five officials believe that the federal funds rate belongs in that range in a given year, but it will not reveal the identities of those five officials.
The minutes of FOMC meetings are released three weeks after the conclusion of each meeting. Typically more than a dozen pages long, the minutes provide further context to the issues raised and decisions announced in the short statements released right after Fed meetings. They include a summary of recent economic activity and economic outlooks prepared by Fed staff members as well as economic outlook by FOMC members and Bank presidents.
Fed officials, of course, can disagree on various issues and the minutes note when officials voice differing views. Like the Fed projections, the minutes’ descriptions of Fed meetings are largely anonymous: they don’t identify which officials disagreed with one another during their discussions.
Still, the Fed minutes provide “a good summary of the range of opinions and how the debate in the meeting unfolded,” said Wellesley’s Sichel. For instance, the minutes that followed the Fed’s historic December 2015 decision to soon begin raising interest rates—the first rate hike in about decade— revealed that the decision was a “close call” and some meeting participants were worried about the uncertain outlook for inflation.
The meeting minutes do name names when it comes to official decisions, however. When it comes to decisions such as raising or lowering the federal funds rate, the minutes list how each FOMC member voted.
When Fed officials talk, market watchers listen and, as with other Fed communications, hope to discern the direction of monetary policy. FOMC members, including the current Fed chair, Janet Yellen, give various speeches at economic conferences, policy organizations and universities. The Fed chair also appears before Congress twice a year, where she provides a report on monetary policy and answers questions posed by members of the House and the Senate.
Last February, Yellen’s testimony made headlines when she told Congress that the Fed wouldn’t rule out lowering interest rates in the U.S. to below zero. (Learn more about negative interest rates here.)
It only took 12 years, but the Fed is now hip to Facebook. The Fed launched a Facebook page on August 18, and announced plans to populate it with posts on “press releases, speeches, testimony, reports, educational material, frequently asked questions, photos, and videos.”
To its credit, the Fed took to other social media platforms earlier: it joined Twitter in 2009 and YouTube the following year. It posts links to various economic reports and surveys on the former and videos of Fed officials’ speeches on the latter. The Fed also has a presence on Flickr, where its photo collection includes a few historical, black-and-white images of former Fed officials as well a number of contemporary photos of officials standing at podiums.