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To those on the outside, the activities of the nation’s Federal Reserve Bank can seem almost inscrutable. The Fed is actually a nationwide network of quasi-public banks and their members, with the leaders of each serving on a range of influential committees. Through its policies and lending activities, the Federal Reserve Bank guides the nation’s monetary activity, steering it toward what its leaders believe will be the norms most productive for the broader economy.
Of all the Federal Reserve Bank’s several committees, the Open Market Committee is certainly the most influential. The Open Market Committee is tasked with setting policies that govern the way the Fed interacts with the private markets that make the national and international economies hum. The policies that the Open Market Committee lays down therefore serve as a bridge between the Fed’s internal resolutions and the real, everyday public activities that contribute directly to economic well-being for average people.
What happens at the average FOMC meeting therefore often revolves around questions related to the broader economy. The Federal Reserve Bank never acts in a vacuum, always seeking to make sure that its decrees and actions will contribute to economic vitality for the United States. The Open Market Committee is most intimately tied to the broader economic situation, though, so its members have to refer regularly to what is going on in the world around them as they deliberate.
The Open Market Committee has a number of tools for influencing the domestic and global economies, but one stands out above the others. That most powerful of cudgels is the so-called overnight lending rate, a toll exacted every time banks engage in the briefest and most common of borrowing from one another and the Fed.
Because overnight lending is such a crucial lubricator of the financial system, the rate set by the Fed tends to have far-reaching effects. A slight bump in the overnight lending rate, for example, directly influences the rate that banks charge for lending to prime-qualified businesses. An increase or drop in that prime lending rate directly affects the rates that consumers pay on their credit card balances and other loans, making the Open Market Committee’s actions especially momentous.
For decades, real estate had been widely regarded as one of the safest investments of all in the United States. That longtime confidence proved to be dangerous to many over the course of the last recession, though, with millions of families suddenly seeing the value they had built up in their homes evaporate. In the wake of a recession fueled by an unexpected danger, the Federal Reserve took some surprising and unconventional steps to alleviate the pain. As a result, the United States, for the first time in decades, found itself with an overnight funds commercial lending rate that essentially amounted to zero.
Not long ago, the Federal Reserve finally adjusted that rate upwards, ending a years-long stretch during which some investors had even been willing to accept negative interest rates on investments they judged sufficiently safe. Moving the rate up by only a quarter of a percent, the Federal Reserve nonetheless signified a desire to move away from the fundamentally strange and unnatural-seeming interest environment that had predominated for so many years by then.
Even so, plenty of questions remain about just how committed the Fed is to restoring what most consider normalcy. The members of its Open Market Committee, the group responsible for setting the federal funds rate, have been somewhat consistent in claiming to want to move the rate even higher at upcoming meetings. At the same time, there are reasons to think that the Fed might be forced to hold back.
One of these is the possibility that even the meager rate rise that has been instituted could stamp out core inflation, making it less likely that consumers will open up their wallets to stimulate the economy further. With inflation only having barely reached levels that most investors consider acceptable, the possibility of quashing it too much and too soon is an unattractive one.
Another threat is the situation in China, where things sometimes seem to be unraveling by the day. While the United States could benefit in some respects from a weakening Chinese economy, the responses that China could take to try to salvage its growth worry many, and this will undoubtedly be a major point of concern at the upcoming fed fomc meeting.