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September 14, 2015 | Weekly Commentary

A highly anticipated Federal Reserve Open Market Committee (“FOMC”) meeting occurs September 16 -17.

The Federal Reserve controls the three tools of monetary policy–open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

We can expect this week’s FOMC to move markets and create a moderate amount of intra-day volatility because the FOMC’s announcement on interest rates will be followed by a press conference with Chairperson Yellen. This provides the opportunity for her to give us intriguing comments and statements of opinion.

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