What is the FED?

• The Federal Reserve (Fed): Typically refers to the central banking system of the United States, formally known as the Federal Reserve System. The Fed is an independent agency of the U.S. government responsible for supervising and regulating the domestic financial system, formulating monetary policy to ensure financial stability and promote economic growth.
• Federal Reserve Board: The governing body of the Federal Reserve, whose chair and other members are appointed by the President of the United States and confirmed by the Senate. The Board is primarily responsible for formulating and executing monetary policy and overseeing the operations of the Federal Reserve System.
• FOMC (Federal Open Market Committee): A committee within the Federal Reserve System composed of seven members of the Board of Governors and four presidents from the twelve Federal Reserve Banks. The FOMC is primarily responsible for setting monetary policy in the United States, including the level of interest rates and other related policies.

How was the Federal Reserve established?

The Federal Reserve System (Fed), the central banking system of the United States, was established based on the Federal Reserve Act passed by the U.S. Congress in 1913 to prevent a recurrence of bank crises like the one in 1907.

The earliest institutions with central banking functions in the United States were the First and Second Banks of the United States, chartered in 1791 and 1816, respectively. Both banks were authorized by Congress for twenty-year terms but were dissolved when Congress refused to renew their charters.

During the "Free Banking Era" from 1837 to 1862, the United States did not have a formal central bank, and from 1862 to 1913, a private national banking system (J.P. Morgan & Co.) served this function.

In 1907, a severe financial crisis occurred in the United States, leading to bank failures, market collapses, millions of people unemployed, and an economic recession. This crisis prompted the U.S. Congress to pass the Federal Reserve Act, creating the Federal Reserve System (FED).

The Federal Reserve System plays a crucial role in the U.S. economy and is a pillar of economic stability. Despite facing numerous challenges, including financial crises, wars, and political struggles, it has continued to develop and improve, becoming one of the most powerful central banks in the world.

Organization Structure of the Federal Reserve

Board of Governors

The Board of Governors, headquartered in Washington, D.C., serves as the head of the Fed. The responsibilities of the Board include:

Overseeing the operations of the twelve Federal Reserve Banks.
Conducting meetings every two weeks to discuss discount rates, reserve requirements, etc.

In terms of personnel, the Board of Governors consists of seven members, including the Chair and Vice Chair, all nominated by the President of the United States and confirmed by the Senate. Additionally, the Governors also serve as members of the FOMC. The term of the Chair of the Board of Governors is four years and can be reappointed. However, if the Chair is removed from office, the other Governors must also step down simultaneously to prevent the former Chair from undermining the new Chair's authority.

If none of the Governors are confirmed by the Senate, the Board of Governors will need to hold an interim meeting before February 2026 to elect new Governors.

Federal Reserve Banks

The main functions of the Federal Reserve Banks are as follows:

• Implementing decisions made by the FED.
• Supervising the U.S. banking and financial system.

It is worth mentioning that the ownership of each Federal Reserve Bank is not solely held by the government but jointly held by the public and private sectors. Each Reserve Bank has its own board of directors, consisting of nine directors, three of whom are appointed by the Federal Reserve Board to represent the public sector; the remaining six are elected by member banks within their respective districts to represent the private sector.

Among the twelve banks, the Federal Reserve Bank of New York is considered a key member due to its responsibility for open market operations and holding the largest assets.

Federal Open Market Committee

The primary responsibilities of the Federal Open Market Committee (FOMC) are:

• Formulating U.S. monetary policy, including setting reserve requirements, discount rates, etc.
• Conducting open market operations, including buying and selling government securities.
• Balancing economic growth and price stability.

Additionally, the FOMC holds eight regular meetings annually in Washington to decide the direction of the federal funds rate (FFR) thereafter.

Regarding personnel arrangements, the FOMC consists of twelve voting members, including seven Governors of the Board of Governors; one is the President of the Federal Reserve Bank of New York responsible for implementing monetary policy, and the remaining four are the Presidents of the other eleven Reserve Banks who take turns serving annually as voting members.

The Chair of the FOMC is held by the Chair of the Board of Governors of the Federal Reserve, and the Vice Chair is held by the President of the Federal Reserve Bank of New York.

Impact of the Fed on the Stock Market

Short-term Impact

The short-term impact of the Federal Reserve rate adjustments mainly manifests in the following aspects:

• Foreign capital flow: An increase in Federal Reserve rates enhances the attractiveness of U.S. assets, causing foreign investors to withdraw funds from the Malaysian stock market in search of higher returns, leading to a decline in the stock market.
• Rise in financing costs: An increase in Federal Reserve rates leads to higher financing costs in Malaysia, which may inhibit corporate investment and consumption, resulting in slowed economic growth and affecting stock market performance.
• Trading volume: Federal Reserve rate adjustments may reduce trading volume in the Malaysian stock market. Investors may adopt a wait-and-see attitude before or after rate adjustments, waiting for market clarity before making investment decisions.
• Currency depreciation: If Federal Reserve rates rise faster than those of the Central Bank of Malaysia, the Malaysian Ringgit may depreciate, leading to increased import costs, affecting corporate profits, and causing a decline in the stock market.
• Sector performance: Different sectors have varying sensitivities to rate adjustments. Generally, sectors highly sensitive to rate hikes, such as real estate and consumer goods, may experience negative impacts on their stock performance. Conversely, sectors less sensitive to rate hikes, such as finance and energy, may experience positive impacts on their stock performance.

Long-term Impact

The long-term impact of Federal Reserve rate adjustments primarily manifests in the following aspects:

• Economic growth: Federal Reserve rate hikes may lead to a slowdown in global economic growth, which may have negative implications for Malaysian exports and economic growth, subsequently affecting stock market performance.
• Investment philosophy: Federal Reserve rate hikes may prompt investors to shift funds from high-risk assets to low-risk assets. This may result in the underperformance of the Malaysian stock market relative to other assets.
• Inflation: Federal Reserve rate hikes aim to curb inflation. If the Federal Reserve successfully controls inflation, it will have a positive impact on Malaysian businesses and consumers.
• In order to effectively regulate the financial system, major economies around the world establish dedicated central banks. These central banks employ measures such as monetary policy adjustments, interest rate cuts, and foreign exchange transactions to maintain financial system stability.

Generally, when economic activities overheat and prices rise, central banks adopt contractionary monetary policies to reduce the money supply, cooling down economic activities to stabilize price levels, and vice versa.

In Malaysia, the Central Bank of Malaysia (Bank Negara Malaysia, BNM) serves as the central bank. The impact of Federal Reserve rate adjustments on the Malaysian stock market cannot be overlooked. Investors should closely monitor the trends of Federal

Reserve rate adjustments and adjust their investment strategies accordingly.

In summary, the impact of Federal Reserve rate adjustments on the Malaysian stock market is complex and depends on various factors, including the magnitude, pace, timing of Federal Reserve rate adjustments, and the actual situation of the Malaysian economy.