Fed (Federal Reserve)
The central bank of the United States — it sets the policy interest rate and adjusts the money supply to manage prices and employment, and its decisions move stock markets worldwide.
The Fed's rate decision = the policy rate is set at the 8 FOMC (Federal Open Market Committee) meetings held each year
When the Fed raises rates and drains money (tightening), it is generally read as a headwind for risk assets; when it cuts and eases, as a tailwind.
In plain terms
The Fed is the central bank of the United States. It plays a role like a country's own central bank, but because the U.S. dollar is the world's reserve currency, the Fed's decisions affect interest rates and stock markets not just in the U.S. but around the world.
The Fed decides whether to raise or lower the policy rate at meetings called the FOMC, held eight times a year. That is why investors pay close attention to these meetings and to every word from the chair (currently Powell).
What it tells you
The Fed weighs two goals — price stability (keeping inflation from running too high) and maximum employment (jobs). When prices run hot, it raises rates to cool things down; when the economy cools, it lowers rates to support it.
So if you know "what the Fed is watching," you can get a sense of where rates are headed, and from the direction of rates you can gauge the overall mood of the market in advance. The Fed's decisions are a force that moves the whole market regardless of any individual company's results.
Formula
The Fed's rate decision = the policy rate is set at the 8 FOMC (Federal Open Market Committee) meetings held each year
What high or low means
When the Fed raises rates and drains money (tightening), it is generally read as a headwind for risk assets; when it cuts and eases, as a tailwind. That said, the market reacts more to whether the outcome "differed from expectations" than to the decision itself.
Along with the decision, the meeting also brings guidance on the path ahead (forward guidance). A shift in the nuance of the wording alone can shake the market.
Markets try to price in the Fed's decisions "in advance." So even when rates go up, if it was already expected the stock price may actually rise, while the same decision can shake things badly if it comes as a surprise. That's why how much the market moves comes less from the decision itself than from the gap with expectations.
The Fed's words are always careful and vague (to reduce market shock). There is always a risk of over- or under-reading the nuance.
Fed moves belong to the macro world, so they are hard to predict and hard for an individual to trade around. This term is background knowledge for making sense of market news. (※ Our screens deal with the financials of individual companies from SEC filings.)
In 1979, when the high inflation of the 1970s just would not come down, Paul Volcker became Fed Chair and, saying that taming prices required accepting pain, pushed the policy rate up to nearly 20% at one point.
The shock brought recession and high unemployment and drew fierce criticism, but in the end inflation that had run above 10% was brought under control. As a case showing that once the Fed decides to tame prices it will accept even a recession, "Volcker's lesson" is still brought up in every inflationary episode.
Metrics to read alongside
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This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.