The Fed funds rate and FOMC decisions
The most traded question in macro is not what the Fed will do eventually, but what it will do at the next meeting - and that one is decided by twelve people on a published schedule.
At a glance
- Set by
- The Federal Open Market Committee, twelve voting members
- Meetings
- Eight scheduled per year, dates published a year ahead
- The instrument
- A target range for the fed funds rate, moved in 25bp steps
- Announced
- 2:00pm ET in the statement; press conference at 2:30pm
What is actually being decided
The Fed does not set an interest rate by decree. It sets a target range - a quarter-point band - for the rate at which banks lend reserves to each other overnight, and then uses its own tools to keep the actual market rate inside that band. The rate that results is the effective federal funds rate, published every day by the New York Fed.
The tools that do the steering matter for anyone reading the fine print of a market. Interest on reserve balances sets the level banks will not lend below; the overnight reverse repo facility puts a floor under money market rates for a wider set of counterparties. Both are administered rates the Fed can adjust without changing the target range at all.
So there are two distinct questions, and prediction markets ask both: what happens to the target range, and what happens to the effective rate. A market that names one and settles on the other is a market you should read twice.
The target range is a decision. The effective rate is an outcome. They usually agree, and the fine print decides which one settles a question.
Who decides, and what they are aiming at
Twelve people vote: the seven governors, the president of the New York Fed permanently, and four of the remaining eleven regional presidents on an annual rotation. Everyone attends and speaks; only twelve vote, and the rotation is public years in advance - which means the hawkishness of a given year's committee is knowable before it convenes.
The mandate is dual and written into law: maximum employment and stable prices. The Fed's own definition of stable prices is two percent inflation over the longer run, measured on the PCE price index rather than CPI. When the two halves of the mandate point in opposite directions - inflation above target while unemployment rises - the committee has to choose, and that choice is where the genuine uncertainty in any rate market lives.
- Board of GovernorsSeven seats, permanent votes
- 58%
- Rotating regional presidentsFour seats, annual rotation among eleven banks
- 34%
- New York Fed presidentPermanent vote, vice chair of the committee
- 8%
Source: Federal Reserve Board
Where the decision is published
The statement lands at 2:00pm Eastern on the second day of a two-day meeting, and it is short. The target range is in the first paragraph; the interesting part is usually the sentence about what would make the committee act next, and any dissenting votes recorded at the bottom.
Four times a year - March, June, September and December - the statement comes with the Summary of Economic Projections, including the chart of individual rate expectations known as the dot plot. It is not a commitment and not a forecast of what the committee will do as a body; it is a snapshot of nineteen individual views, anonymised, and it moves markets anyway.
The press conference at 2:30 has repeatedly moved markets further than the statement did, in the opposite direction. Minutes follow three weeks later with the discussion behind the decision.
- Statement: 2:00pm ET, with the target range and any dissents.
- Summary of Economic Projections and dot plot: four meetings a year.
- Press conference: 2:30pm ET, and frequently the larger market event.
- Minutes: three weeks after the meeting.
Behind the subscription
The rest of this entry is the part that changes a decision: what moves the price, which contract sets it, who ships it and where that can be cut off.
What moves a decision
The seven inputs that decide a cut, a hold or a hike - from the inflation trend and the labour market to the committee's own guidance and the calendar.
Where rate expectations are priced
The contracts that carry a rate view, how a futures price becomes a probability, and the assumption inside that conversion that nobody states.
How a decision travels
The chain from a statement to a mortgage rate, and why the press conference regularly moves markets further than the decision did.
How this shows up in prediction markets
What a rate question actually settles on, why the futures-implied probability is a starting point rather than an answer, and the four checks before you disagree with it.
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Frequently asked questions
- Who actually votes on interest rates?
- Twelve members of the FOMC: the seven governors, the New York Fed president permanently, and four of the remaining regional presidents on an annual rotation. The rotation is published years in advance, so the composition of a given year's committee is known before it meets.
- What is the dot plot and how much does it mean?
- A chart of individual rate expectations from all nineteen participants, published four times a year. It is anonymous, it is not a commitment, and participants have moved away from their own dots within a quarter - but it is the clearest published map of what the committee itself expects.
- How are Fed rate probabilities calculated?
- From fed funds futures, which settle on the monthly average effective rate. The implied probability comes from where the contract prices relative to the current rate and the possible outcomes, usually assuming a choice between two adjacent moves. That assumption is what makes the widely quoted number a simplification.
- Why do markets move at the press conference rather than the decision?
- Because the decision is normally priced in advance while the guidance is not. The statement confirms what was expected; the chair's answers reshape the expected path, which is what the curve actually trades.
Primary sources
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