The predictable changes in the federal interest rate have a decisive impact on the financial markets in general, and on the bond market in particular.
The Central Bank
The authority to alter the interest rate in the U.S. rests with the Central Bank, i.e., the Federal Reserve Board, or simply, the Fed. The financial community closely monitors statements by the Chairman of the Board of Governors of the Federal Reserve System that are likely to indicate the agency’s future intentions. The central bank was founded in 1913 and has two primary responsibilities:
- Assuring stability of prices and employment.
- Supervision of the banking system.
A committee known as the Federal Open Market Committee (FOMC) operates as a part of the Fed. This committee, which meets several times each year, determines the measures that the Fed will employ in order to achieve its goals.
The Fed uses three tools to achieve its goals:
- Setting the interest rate in the economy.
- Controlling the money supply in the economy.
- Intervention in the foreign currency market.