The Federal Open Market Committee (FOMC) meets several times a year and decides, at those meetings, what they will do with interest rates. Specifically, they set the federal funds target rate.
The federal funds target rate is the interest rate that commercial banks borrow at from one another overnight. This is to cover shortfalls, as a result of reserve requirements, that may occur as a result of daily activities. This ends up having downstream effects and that's why we refer more broadly than as the inter-bank lending rate.
When the Fed changes rates, it affects everything with an interest rate that matters to you – savings accounts, certificates of deposit, credit card, mortgages, auto loans, etc. When the Fed increases the rates, the interest rates on all of those accounts and loans goes up. When the Fed lowers them, they all go down accordingly.
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The FOMC meets eight times a year to set these rates, as well as share it's thoughts on the economy and where we are headed. The Fed holds eight 2-day meetings each year and the schedule is published ahead of time. On the second day of the meetings, the FOMC will release its decision at 2PM Eastern.
In the latest Fed meeting in July, the Fed decided to keep rates the same. It is worth noting that two of the members dissented, which is the first time two Fed governors dissented since 1993. Federal Reserve Governors Michelle Bowman and Christopher Waller said they would have supported a 25 basis point cut because of the slowing of economic growth and a less “dynamic” labor market.
We will see what this means for the next meeting.
The next FOMC meeting is September 16-17.
The dates for 2025 are:
- January 28-29
- March 18-19 – associated with a Summary of Economic Projections
- May 6-7
- June 17-18 – associated with a Summary of Economic Projections
- July 29-30
- September 16-17 – associated with a Summary of Economic Projections
- October 28-29
- December 9-10 – associated with a Summary of Economic Projections
How do experts know what the Fed will likely do?
No one knows for sure what the Fed will do but when experts talk confidently on television or social media, it's likely because they are looking at two things.
First, the CME FedWatch tool conveniently looks at what interest rate traders are doing with regard to 30-Day Fed Funds futures prices and puts it as a probability for a Fed rate change. The chart shows you what traders are thinking, in aggregate, based on their bets in the market. As of September 1st, traders anticipate a 91.8% chance that the Fed lowers the target rate to 4.00-4.25%.
Next, they also likely look at the Summary of Economic Projections report produced by the FOMC. This includes everything the FOMC believes is true about the future of the U.S. economy – including where FOMC participants thing the future of interest rates is heading. If you go to page four of the latest report dated June 18th, you'll see that most believe rates will come down in 2025.
While it's impossible to know what the Fed will do, these do offer insight on the direction, if not the exact timing.
