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The Impact the FOMC Meeting has on the Economy

Most people have no idea just how the decision to raise or lower interest rates comes about. A lot of people know that the decision is made by the Federal Reserve, but they probably aren’t aware of how the decision is made in regards to how much interest they pay on products as well as securities. The process is actually quite simple, and the decisions are made a FOMC meeting.

FOMC stands for Federal Open Market Committee. This committee is comprised of 12 people, The president of the NY Federal Reserve, 7 Board of Governors and 4 federal reserve presidents from one of the many other federal reserves in the US. The final four rotate out each year, while the Board of Governors remains static, replaced when they choose to move on. These people meet 8 times a year, their goal is to determine the financial security of the US and decide whether or not interest rates should increase.

For a number of years, the FOMC has made the determination not to raise rates. They do this by providing fed loans to banks to help them maintain their required cash on hand. Having the cash on hand provides the banks with the ability to offer loans at lower rates. When the FOMC decides to raise rates, they do so by sending securities to the banks instead of cash. Banks then have to create new loans with higher interest rates in order to generate enough cash to maintain their minimum requirements.

One downside to this system is that no matter what the FOMC decides, banks are allowed to charge whatever interest rates that they see fit. This can be frustrating for consumers, but this is why it’s so important to shop around. Different lenders will have different rates because they do have the flexibility. Some banks keep mortgage loans at the lowest interest rates, but will increase rates on credit cards and personal loans.

Regardless, the FOMC impacts the economy by ensuring that banks can provide low interest loans to increase home purchases. This allows people to pay off their debts, not go into foreclosure or move as needed. The positive impact that this has can’t be understated, but with eight meetings a year, it’s possible that the next meeting will result in higher interest rates, so now is the time to buy.