When there is a fluctuation in global markets or sudden changes in the economy, everyone’s eyes turn to one place: FED interest rate decision. So why is this decision so important? The FED’s raising or lowering of interest rates is a factor that directly affects not only banks and investors, but also your pocket. Many economic elements, from loan rates to exchange rates, from stock market movements to inflation, are shaped under the shadow of this decision. So, What exactly is the FED interest rate and how is it determined? Let’s explore this critical issue together! Of course, first, let’s take a brief look at what the FED is.
What is FED?
FED is known as the Federal Reserve System in English. It is the central bank system of the United States. It was established in 1913 by Woodrow Wilson under the Federal Reserve Act. The system operates with its headquarters in Washington, DC and 12 regional banks across the country in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. The FED aims to maintain financial stability and support economic growth.
Basic Functions of the FED and Their Effects on Monetary Policy
The FED supports the healthy functioning of the U.S. economy by performing five main functions. These functions include managing monetary policy, ensuring the stability of the financial system, supervising and regulating the banking system, developing payment and clearing systems, and protecting consumer rights. The decisions taken by the FED can directly affect not only the US economy but also global financial markets.
The Importance of Interest Rates for the Economy
Interest rates are one of the most important macroeconomic tools that have a direct impact on economic growth, inflation and investment decisions. Central banks aim to control inflation and cool down an overheated economy by increasing interest rates, while they can encourage investment and consumption and support economic growth by lowering interest rates. In addition, interest rates can affect exchange rates and capital flows, leading to significant fluctuations in global markets. For this reason, interest rate policies play a decisive role not only in domestic markets but also in international economic balances.
Fundamentals of FED Interest Rate Decisions
How does the FED determine interest rates?
The U.S. Federal Reserve (FED) tries to balance the economy by setting interest rates to guide monetary policy. One of the most important tools in this process is the federal funds rate, which is the overnight lending rate between banks. The Federal Open Market Committee (FOMC) meets eight times a year to evaluate economic indicators and set a target range for this rate.
Changes in the FED’s interest rate policy have a direct impact on financial markets and economic conditions. When the economy slows down or inflation is low, the FED provides more liquidity to the market and reduces borrowing costs by lowering interest rates. This supports economic growth by stimulating investment and consumption. Conversely, if inflation rises or the economy overheats, raising interest rates aims to maintain price stability by restricting spending and investment.
The Federal Open Market Committee (FOMC) and the process for making interest rate decisions
The Federal Open Market Committee (FOMC) is the main body that makes monetary policy decisions for the Federal Reserve (Fed). It meets eight times a year to evaluate current economic data and financial conditions. From these evaluations, it sets a target range for the federal funds rate, the overnight lending rate that banks charge each other. The goal of the FOMC can be explained as directing monetary policy to ensure maximum employment and price stability.
The effect of factors such as inflation, unemployment, and growth on interest rate decisions
If the inflation rate is above the targeted level, the FOMC aims to reduce demand and control price increases by increasing interest rates. Conversely, if there is high unemployment or slowing economic growth, it lowers interest rates to reduce credit costs and try to stimulate economic activity. This balanced approach is a reflection of the Fed’s “dual mandate” policy.
The Effects of the Fed’s Interest Rate Decisions on the Economy
Effects on Inflation: The consequences of an interest rate increase or decrease on inflation
The Fed’s interest rate hikes reduce consumer spending and investment by increasing borrowing costs. Thus, they aim to reduce inflation by easing demand pressure. Interest rate cuts, on the other hand, have the opposite effect, increasing demand and may cause inflation to rise.
Effects on Employment and Growth: The relationship between low and high interest rate environments and unemployment and economic growth
Low interest rates encourage investment and employment by enabling businesses to obtain loans under more favorable conditions, which supports economic growth. High interest rates increase borrowing costs, restricting investment and consumption. This can slow economic growth and negatively affect employment.
Effects on the Dollar and Exchange Rates: Effects of interest rate decisions on the dollar index and other currencies
Since FED interest rate hikes mean higher returns for foreign investors, they can cause the dollar to appreciate. This causes the dollar to strengthen against other currencies. Interest rate cuts can have the opposite effect, causing the dollar to lose value.
The Impact of Fed Interest Rate Decisions on Financial Markets
Stock Markets and Stocks: The Impact of Interest Rate Changes on Investors and Stock Indices
Changes in interest rates can affect companies’ borrowing costs and future earnings expectations, causing fluctuations in stock prices. For example, interest rate hikes usually lead to a fall in stock prices, while interest rate cuts can lead to a rise.
Crypto Asset Market: Bitcoin and altcoins’ reaction to FED decisions
Although crypto assets are traded independently of the traditional financial system, the FED’s interest rate decisions affect investors’ risk appetite and liquidity conditions, causing volatility in crypto asset markets.
Bond Market: The relationship between interest rates and bond yields
There is an inverse relationship between interest rates and bond yields. The FED’s interest rate hikes reduce the value of existing bonds, causing yields to rise, while interest rate cuts increase bond prices and lower yields.
FED Interest Rate Expectations and Market Reaction
FED meeting dates and market pricing
The US Federal Reserve (FED) has announced the Federal Open Market Committee (FOMC) meeting schedule to be held in 2025 and 2026. The FOMC, which is scheduled to meet eight times every two years, has the following 2025 meeting dates:
- January 28-29
- March 18-19
- May 6-7
- June 17-18
- July 29-30
- September 16-17
- October 28-29
- December 9-10
On the second day of each of these meetings, the policy decision text will be released and then the Fed Chair will hold a press conference. Markets closely follow the decisions coming out of these meetings, evaluate clues about interest rates and monetary policy, and make pricing accordingly.
Market expectations and speculations ahead of interest rate decisions
Market participants take positions by speculating about the FED’s possible moves. During this process, the economic data announced and the statements of FED officials play a critical role in shaping expectations.
What is a dot plot? How to read the FED members’ interest rate projections?
A dot plot can be explained as a graph showing the FOMC members’ individual estimates of future interest rates. Each dot represents the interest rate forecast by a member for a particular year-end. This graph is an important indicator of the FED’s future policy stance for the markets.
FED Policies and Future Expectations in Recent Years
FED policies during the post-2020 pandemic
In order to mitigate the economic effects of the COVID-19 pandemic, the FED implemented expansionary monetary policies by reducing interest rates to near zero levels and provided liquidity to the market with asset purchase programs.
2022-2023 interest rate hike cycle and reasons
With inflation rising faster than expected in the post-pandemic period, the FED started gradual interest rate hikes in 2022 and 2023. These steps aimed to control inflation and ensure economic stability.
Expectations for 2024 and beyond (inflation, recession, interest rate cut scenarios)
Fed’s monetary policy, after aggressive interest rate hikes in 2022 and 2023 to control inflation, Fed reduced interest rates as of 2024. Fed, which left interest rates constant at the beginning of 2025, will be influenced by many factors such as economic growth and employment data for its future interest rate decisions.
