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Inside an FOMC Meeting: How the Fed Actually Decides

Beginner Investing • 7 min

What this lesson is about

What actually happens in the room where the Federal Reserve sets interest rates. And why Paul Volcker once triggered a recession on purpose.

2 parts · a quick check after each · then the quiz

Part 1 of 2

In 1981, Fed Chair Paul Volcker raised interest rates to nearly 20%. He even triggered a recession to do it. Inflation was spiraling out of control. Volcker believed the only solution was to make borrowing so costly that the economy would slow down. It worked, but it was brutal. Unemployment shot up, and Volcker received death threats. Still, inflation dropped and remained low for the next 40 years.

This is the kind of decision the Federal Reserve's Federal Open Market Committee (FOMC) makes eight times a year. It's 12 people working under a "dual mandate": keep prices stable and maintain high employment as much as possible.

Quick check

In 1981, Fed Chair Paul Volcker raised interest rates to roughly 20% and deliberately triggered a recession. What was he trying to accomplish?

Part 2 of 2

Insider Angle: The actual rate decision is often the least interesting part. What really gets markets buzzing is "forward guidance." These are hints about what the Fed might do next. A single word change in the FOMC statement can shift trillions of dollars in markets within seconds. Investors focus on the Fed's future direction, not just today's decision.
Try This: Check the current fed funds rate and the 10-year Treasury yield on a public macro data source. Then, look at the yield curve shape. Normal, flat, or inverted. That shape shows the market's own forward guidance on where it thinks the economy is headed.
Bond prices and ratesMove the rate. Watch the price go the other way.

Quick check

The FOMC has two competing goals set by Congress. What are they, often called the Fed's 'dual mandate'?

Quiz

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