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What is the Federal Reserve?

The Federal Reserve is the Central Bank of the United States of America. It is a quasi-government body where the Chairman is appointed by the President and approved by the US senate for a term of four years. The US is one of the most powerful nations and its rates have an impact on the money supply and inflation.

What is the Fed Rate?

The finance gurus keep a close watch on the board members of the Fed to predict whether the interest rate will be increased, decreased, or kept unchanged. The Fed rate is among the most awaited and followed rates in the global economy. You see the rate announced by the Federal Reserve is the minimum-maximum range in which the US Banks can conduct overnight lending. The Federal Open Market Committee (FOMC) is in charge of the United States’ monetary policy. The FOMC meets 8 times a year and the meeting lasts 2 days. The last meeting was held on April 30 – May 1 when the Fed announced in its policy decision that the rates would be in the range of 5.25 to 5.5 percent.

Impact on India

When the Federal Reserve announces a rate hike it means the US economy is facing inflation. The rate hike is an attempt to make the US dollar stronger. The assets are cheaper in US markets and expensive in the global market. The Foreign Institutional Investors (FII) remove their investment in the Indian market and move to the US markets. Hence it has a direct impact on the Indian Stock market. When the FIIs invest in a stock the price increases and when they remove their investment the price falls. The RBI increases the rate to control the supply of money and maintain the stability of the Indian rupee against the US dollar. Just as the FOMC meets to decide the Fed rate, RBI holds the Monetary Policy Meeting (MPC) to decide the interest rate. In the MPC meeting held on the 5th, 6th, and 7th of June, RBI kept the interest rate (repo rate) unchanged at 6.5%.

Chairman of the Federal Reserve

The Chairman of the Federal Reserve is one of the most powerful individuals to impact the world economy. Currently, Jerome Powell is the Chairman of the Fed being appointed by Donald Trump’s government and re-appointed by President Joe Biden. In the history of the institution, Janet Yellen was the only woman to have served as a Chairman of the Federal Reserve during Barack Obama’s presidential term.