To many new traders, the thought of having to keep track of the numerous variables that can affect the market’s movements can be overwhelming.

Obviously, a major earthquake that strikes a main technology producing city, or a popular CEO of a major S&P 500 company that dies in an accident are variables that are impossible to control.

On the other hand, things like new environmental laws and shifts in monetary policy by the Federal Reserve are variables that smart investors can anticipate and prepare for.

I know a lot of folks talk about the Fed, the role it plays in the financial markets.

But today I want to do a deep dive with you—explain the latest developments from this week’s meeting and how it may impact your portfolio.

What is the Federal Open Market Committee (FOMC) and why is it Important?

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy by directing open market operations, which is the practice of buying and selling primarily U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks.

Essentially, the FOMC’s main purpose is to set monetary policy in order to fulfill the mandates of the Federal Reserve, which include price stability, maximum employment, and stable long-term interest rates.

What in the world is the FOMC “dot plot”?

While the committee meets eight times a year, only one meeting each quarter involves a Summary of Economic Projections. One key item on the agenda during these quarterly summaries is the “dot plot,” which is a visual representation of where each member of the FOMC thinks the Federal funds rate should be at the end of each of the next three years ,as well as into the future.

While the “dot plot” is not an official tool of the FOMC, it does provide investors with invaluable insight regarding what various members of the FOMC are thinking.

Here we see the Federal Reserve’s “dot plot” from the most recent FOMC meeting that concluded on June 16th:

Each dot represents where an individual member of the FOMC thinks the Federal funds rate should be at the end of the year given the current economic information. Of course, it’s all kept anonymous, and no one knows which official is which dot.

What’s the federal funds rate, you ask?

Well, it’s the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight.

On the Y-axis is the fed funds rate, and on the X-axis is the year for which officials gave their forecast.

By looking at the chart, you can identify where opinions cluster, which allows investors to get a feel for where the Fed’s bias may lie.

As seen above, 7 of the 18 committee members expect that rates will be higher at the end of next year, and 13 members look for higher rates at the end of 2023.

What does this mean for stocks?

Make no mistake; any change in the policy language used by the Federal Reserve’s committee members is important.

As you continue to grow and develop as a trader, however, it is important to understand that markets very rarely reverse major trends as the result of one FOMC meeting, or one major news event, or one anomalous economic data report.

To reverse the course of a long-term market trend as strong as the one being created across the major US equity indices post the COVID crisis is akin to steering a battleship into port. In other words, topping is a process.

Therefore, as we look at a benchmark S&P 500 that is still trading right around a rising 50-day moving average as the chart below reveals, there are still no meaningful indications that a major topping process has begun.

In other words, the trend remains your friend.