U.S. Federal Reserve

Federal Reserve or the Fed, the U.S. Central Banking System, is the most powerful economic institution in the world. Managing the money supply, setting interest rates, and regulating financial markets is the major responsibilities of the Fed. The Federal Reserve (the Fed) is responsible for overseeing monetary policy, regulating bank holding companies and member banks, and monitoring systemic risk in the U.S. financial system.

The seat of power of this system is the Board of Governors, which is composed of seven members based in Washington, DC, and currently led by Fed Chair Jerome Powell. The president appoints each member for a 14-year term, which must be confirmed by the Senate. Additionally, the Board of Governors is part of the larger FOMC (Federal Open Market Committee), which includes five of the twelve regional bank presidents. The FOMC’s primary duties are setting interest rate targets and managing the money supply. The FOMC makes monetary policy decisions by considering the wealth of economic data such as employment, trends in prices and wages, foreign exchange markets, business investments, and consumer spending and income.

Federal Funds Rate

The target interest rate set by the FOMC (Federal Open Market Committee) is termed the Federal Funds Rate. The target rate is based on the borrowing and lending reserves between commercial banks. The FOMC meets eight times a year to set the target Federal Funds rate to promote economic growth.

Understanding Federal Funds Rate Decision

The Federal Reserve adjusts the federal funds as per the economic conditions and inflation. When the economy leads to too much inflation, the Fed raises interest rates, while it reduces interest rates when the economy looks weak and highly unemployed.

The last Federal Funds Rate decision was made on March 2, 2023; the Fed Rate hikes 4.75% to 5.00% on the rate change of +25 bps. FOMC cuts the Fed rate to cope with Covid-19 as the Federal Funds rate of 1.50% to 1.75% on the rate change of -100 bps.

It is also to be considered that the Fed holds its rate at zero around the first quarter of 2022. The Fed also buys billions of dollars every month to stimulate the economy.

Impacts of Federal Funds Decision on Gold and Oil Bulls

On Monday’s Asian trade, gold futures rebounded by almost $10 and reached a session high of $2,025. This followed Friday’s settlement, where gold prices dropped nearly $40 or 2%, marking its largest one-day decline in three weeks. Other commodities also suffered losses after comments from Waller, which led to the dollar rebounding from a one-year low. As a result, crude prices settled with only a modest gain, despite the global energy agency IEA upgrading oil’s demand prospects in 2023.

On Monday’s preliminary trade, both U.S. West Texas Intermediate (WTI) and London-traded Brent Crude prices were slightly higher. Although the oil benchmarks gained less than half a percent on Friday, they advanced more than 1% each for the entire week.

The Federal Reserve is expected to increase interest rates again in its May 3rd decision, despite easing inflation data. However, some economists are betting on the Fed to pause on rates due to the Consumer Price Index (CPI) expanding at an annual rate of 5% in March, which is above the Fed’s appetite for inflation of 2% per annum. U.S. wholesale prices also fell their most in nearly three years last month, according to a separate reading on inflation. While short-term inflation expectations have increased, U.S. Policymakers face a delicate balance.

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