The FOMC: twelve votes, one rate.

012013: a tantrum over one sentence

In May 2013 the Federal Reserve was buying $85 billion of bonds a month, $45 billion of Treasuries and $40 billion of mortgage bonds, to hold long-term interest rates down after the financial crisis. On May 22, answering a question in Congress, Chair Ben Bernanke said that if the economy kept improving, "in the next few meetings, we could take a step down in our pace of purchases."

Nothing had changed yet. No purchase had been cut and no rate had moved. The 10-year Treasury yield had already been creeping up since the start of May, from 1.66%, as strong jobs numbers had traders guessing at a slowdown; it went from 1.94% the day before to 2.03% that day. On June 19 he set out a rough timetable: slow the purchases later that year and end them around the middle of 2014. The yield went from 2.20% the day before to 2.60% within a week, and finished the year at 3.04%.

Traders called it the taper tantrum. A few sentences, not a decision, had pushed up long-term borrowing costs across the country. That is what this lesson is about: the committee that decides, and why markets hang on what it says as much as on what it does.

02Who sits at the table

The Federal Open Market Committee, the FOMC, has twelve votes: the seven governors of the Federal Reserve Board in Washington, the president of the Federal Reserve Bank of New York, and four of the other eleven regional Reserve Bank presidents, who take turns voting for a year at a time. The presidents who aren't voting that year still attend and argue their case, so the debate usually has nineteen people in it. The Fed's chair leads the committee: puts forward the policy the committee votes on, and usually speaks for it after the meeting.

The governors are nominated by the President and confirmed by the Senate. The regional presidents are chosen by their own banks' boards (the directors who don't represent banks), with the Board of Governors' approval. That mix is deliberate: Washington appointees and regional voices, from all over the country, in one room.

03What it decides

Congress gave the Fed two jobs: stable prices and maximum employment. They usually point the same way, and when they don't, the committee's arguments are mostly about which one is in more danger. Its headline decision is a target range for the federal funds rate, the rate banks charge each other for overnight loans. The rates lesson follows that one rate through mortgages, bonds, stocks and savings. The committee also decides what to do with the Fed's own holdings of bonds: buy more (quantitative easing), or let them mature without replacing them (quantitative tightening). And it decides what to say, which often matters more than either.

04Meeting day, hour by hour

The committee meets eight times a year on a published schedule, usually over two days. It can also act between meetings when it has to: in March 2020, as the pandemic hit, it cut rates twice outside its schedule, the second time on a Sunday. Its decision comes out in a short statement at 2:00 p.m. Eastern time on the second day. Half an hour later the chair usually holds a press conference. Four of the eight meetings, in March, June, September and December, also bring the Summary of Economic Projections: each participant's forecasts for growth, unemployment, inflation and the rate itself. The minutes, a fuller account of the debate, come out three weeks later, and can move markets all over again.

Around each meeting, the participants go quiet. The blackout starts at midnight on the second Saturday before the meeting and runs to the end of the day after it; during it they don't talk publicly about policy. That silence is deliberate: it keeps the decision from leaking out in pieces.

05Words that move markets

The statement is short, and traders compare it with the last one word by word. A phrase added, dropped or softened can move bond yields within seconds, because it changes what the market expects at the meetings ahead. That is the point: the committee can use its words, called forward guidance, to steer longer-term rates without moving the overnight rate at all. A 10-year yield is mostly the market's guess at where the overnight rate will average over ten years, as the rates lesson explains, so a sentence about the path ahead moves it.

The language traders use for it is simple. Hawkish means leaning toward higher rates to fight inflation; dovish means leaning toward lower rates to support jobs and growth. A hike delivered with dovish words can send yields down; a hold delivered with hawkish words can send them up.

The press conference can move markets as much as the statement. On December 19, 2018, the committee raised rates as expected, and the chair, Jerome Powell, was asked about the Fed's shrinking bond holdings. He said they were running on "automatic pilot," and that he didn't see that changing. Investors heard a Fed that wouldn't bend if the economy weakened: the S&P 500 fell 1.5% that day, and kept falling for the next two.

Every vote is published, and so is every dissent, with what the dissenter wanted instead; the minutes give the reasons. A dissent is a public disagreement, not a defeat: the decision still stands. Dissents used to be rare: from 1957 to 2013, only 6% of votes cast were against the decision. They've become more common. In July 2026 three members voted for a hike when the committee held; in September the committee hiked. A dissent tells the market where the argument is, and which way it's leaning.

06The dot plot: a forecast, not a promise

Since January 2012, at the meetings with projections, now four a year, participants mark where they think the rate should be at the end of each of the next few years and in the longer run, and the Fed publishes the marks as dots on a chart, without names. The middle dot, the median, gets the headlines.

The dots are a forecast, not a promise. Each one is a person's guess, based on their view of where the economy is heading, and they move as the data do. Markets often disagree with them: when futures price fewer cuts than the dots, one side will turn out wrong, and in the meantime the gap is something traders watch.

07What the market expects: fed funds futures

Before each meeting, the market has already placed its bet, and you can read it like a betting line. Fed funds futures settle on the month's average effective fed funds rate, where banks actually lend inside the target range: a price of 96.00 means an average of 4.00% (100 minus the price). If a meeting falls partway through the month, that average blends the rate before the meeting with the rate after it. You know the rate before, so the price tells you the rate the market expects after.

This is the arithmetic behind the probabilities quoted in the news before every meeting (the futures exchange CME publishes the best-known version, its FedWatch tool). It is also why the decision itself rarely surprises: by the day of the meeting the odds are usually close to 0% or 100%, and the committee seldom wants to deliver a shock.

The odds can still swing fast in the days before. In June 2022, officials had signaled a half-point hike. Then a hot inflation report on Friday, June 10, and a newspaper report on Monday, June 13, during the blackout, that a bigger move was under consideration, sent the futures odds of three-quarters of a point to more than 90% by that evening; the S&P 500 fell 3.9% that Monday. The committee delivered the three-quarter point on Wednesday, and stocks rose 1.5% that day. The surprise had already happened, two days earlier.

08Try it: read the futures

Set today's rate, the meeting's day in the month and the futures price. The gold line is the overnight rate through the month, before and after the meeting; the dashed line is the month's average the futures price implies.

Try 96.00: no change priced. Try 95.90: a hike is now about 92% priced. Set the meeting late in the month, day 28, and see how much more a small price change means: there are only a couple of days left for the new rate to count.

09Hawkish and dovish surprises

What moves markets is the gap between what the committee does or says and what was priced. The usual direction of the first reaction:

That is for a surprise about the next few meetings. A surprise about the long run, like the taper in 2013, hits the 10-year hardest. These are first reactions, sometimes reversed within the day as traders digest the press conference. The rates lesson has what higher and lower rates do over the months that follow.

10Common misreads

• "The decision is the news." It is usually priced in days ahead. The news is the statement, the dots and the press conference.
• "The chair decides." The chair leads and usually carries the vote, but there are twelve votes, and dissents are public.
• "The dots are a plan." They are individual forecasts, and they change with the data.
• "The Fed sets mortgage rates." It sets an overnight rate. Longer rates are set by the market, as the rates lesson shows.
• "A hike is bad for stocks." A hike the market expected can leave stocks higher. A surprise is what hurts.