[Beginner's Guide to Stock Market] Market Shakes at Powell's Word... How Does the FOMC Affect the Stock Market?

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Last week, the biggest event in our stock market was the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) regular meeting.

At this FOMC, Fed Chair Jerome Powell mentioned that there would be no rate cuts within the year, causing the three major New York indices as well as the KOSPI to start the day below the 2500 level.

Investors who trade stocks inevitably pay close attention to the results of the regularly held FOMC meetings.

What exactly is the FOMC that causes such an impact on the stock market?

Let's take a look at the correlation between the FOMC and the stock market.

Powell: “No rate cuts within the year”… KOSPI breaks below 2500

[Image source=EPA Yonhap News]

On the 3rd (local time), at the FOMC regular meeting, the Fed announced a 0.25 percentage point increase in the benchmark interest rate,

marking the third consecutive ‘baby step’ (a 0.25%p increase at a time), raising the U.S. benchmark interest rate to 5.00?5.25%.

Although the rate hike matched market expectations, what influenced the market was Chair Powell’s remarks.

The market had expectations that ‘this would be the last rate hike.’

However, in the subsequent press conference, Powell said, “The decision to pause rate hikes has not been made,” and “If a more restrictive monetary policy is needed, we are prepared to do more,” suggesting the possibility of further hikes.

He then disappointed the market by adding that there would be no rate cuts this year.

Powell stated, “The committee believes inflation will not come down that quickly,” and “It will take some time, and under such circumstances, if the outlook is generally correct, cutting rates would not be appropriate.”

He concluded by saying, “We will not cut rates.”

Following Powell’s remarks, on the 4th, the KOSPI opened below 2500 at 2494.82, fluctuated around the 2500 level, and closed just above it at 2500.95.

What is the FOMC (Federal Open Market Committee)?

▲Jerome Powell, Chair of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

As you can see, our stock market is influenced by the decisions of the FOMC.

So, what exactly is the FOMC?

First, to understand the FOMC, you need to understand the Federal Reserve (Fed).

The Fed is, simply put, similar to the Bank of Korea in our country.

The Bank of Korea adjusts the money supply to stabilize prices by raising or lowering interest rates.

In the U.S., the institution that plays the same role as the Bank of Korea is the Federal Reserve (Fed).

The Fed officially launched on December 23, 1913.

The Fed consists of 12 regional Federal Reserve Banks, the Board of Governors, and the Federal Open Market Committee (FOMC).

Among these, the FOMC is the body that decides monetary policy.

The current Fed Chair is Jerome Powell.

The Fed Chair is nominated by the President of the United States, serves a 4-year term, and can be reappointed.

Just as global stock markets fluctuate with a word from Chair Powell, the Fed Chair’s remarks carry tremendous weight.

The FOMC, which includes the Fed Chair and the Board of Governors, holds eight regular meetings a year to decide U.S. monetary policy. Among these, the meetings held in March, June, September, and December are especially important.

This is because major policies, such as interest rate decisions that greatly affect the economy, are often made at these meetings.

You can check the FOMC schedule on the U.S. Federal Reserve’s official website. For investors, checking the FOMC schedule and anticipating how our stock market might move is a good way to study investment.

Doves vs Hawks

[Image source=Yonhap News]

“The stock market fluctuated greatly due to Chair Powell’s hawkish remarks.”

“The stock market showed strength due to dovish comments from senior Fed officials.”

You may have seen phrases like these in articles related to the FOMC.

While you can infer the context, you might be unsure about the exact meaning of doves and hawks.

Doves are commonly symbols of peace, while hawks have a sharp, fierce image.

Similarly, doves represent a dovish stance, and hawks represent a hawkish stance.

As mentioned, several Federal Reserve Board members attend the FOMC to decide monetary policy.

Some may argue that the economy is doing well enough to raise rates, while others may say the economy is still sluggish and rates should be lowered.

Generally, those who advocate raising rates are hawks, and those who advocate lowering rates are doves.

However, one thing to keep in mind is that rate hikes are not inherently good or bad, and depending on the economic situation, one can be a hawk or a dove.

A representative example is the COVID-19 period.

When the global economy was severely impacted by COVID-19, hawkish Fed members turned dovish and actively supported lowering rates to 0%.

Both hawks and doves can change depending on economic conditions, and neither side is always right.

Dear Joorini,

Rather than focusing on the terms hawk and dove, I hope you consider from a macro perspective why rates are being raised or lowered.

By thinking about how our stock market is affected in the process, you will be able to make wise decisions without losing your way in the world of investment.

Wishing all Joorini wise investments today as well, I will end this article here.

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This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and complex economic stories in an easy and friendly way so that stock beginners can understand. By subscribing, you can receive articles for free.

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