The Federal Open Market Committee (FOMC) meeting is a key date on every trader’s economic calendar. Taking place eight times a year, the meeting is an important event for all traders to prepare for. FOMC (Federal Open Market Committee) is the branch of the United States Federal Reserve that determines the course of monetary policy. The announcements inform everyone about the US Federal Reserve’s decision on interest rates and are one of the most anticipated events on the economic calendar. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation’s central bank.  As one of the key gauges of the future of the US economy, the meeting usually generates a considerable amount of market movement both before and after it takes place.

So – how can you make the most out of this economic event as a part of your trading strategy? The first step is to be fully informed about what exactly is at stake in the FOMC meeting, and what kind of opportunities arise from the talks.

We’ve collated all the information you need to help you to plan ahead.

Structure of the FOMC

FOMC consists of twelve members. The seven board members are all appointed by the US president, and the board chair usually serves as the chair of the FOMC. The five bank presidents consist of the president of the Federal Reserve Bank of New York – who also serves as the FOMC vice-chair – plus four others, rotated on a yearly basis. The FOMC holds eight regularly scheduled meetings per year. While the meeting is entirely private, the key decisions are announced at a press conference shortly after the meeting has finished.

Using a wealth of economic data allows the committee members to evaluate whether they want to drive or slow inflation in relation to money supply and the target inflation rate of 2 percent

2020 Committee Members

• Jerome H. Powell, Board of Governors, Chairman
• John C. Williams, New York, Vice Chairman
• Michelle W. Bowman, Board of Governors
• Lael Brainard, Board of Governors
• Richard H. Clarida, Board of Governors
• Patrick Harker, Philadelphia
• Robert S. Kaplan, Dallas
• Neel Kashkari, Minneapolis
• Loretta J. Mester, Cleveland
• Randal K. Quarles, Board of Governors

 

Currently 2 places are vacant and only 10 members are present in the committee. 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.

How does the FOMC affect the federal funds rate?

While it doesn’t have a direct say over the rates charged by banks to lend money to each other, the FOMC can indirectly change the fed funds rate using three policy tools that affect money supply. The Federal Reserve controls the three tools of monetary policy of open market operations, the discount rate, and reserve requirements.

Open market operations (OMOs) : The purchase and sale of securities in the open market by a central bank–are a key tool used by the Federal Reserve in the implementation of monetary policy. Before the global financial crisis, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate–the interest rate at which depository institutions lend reserve balances to other depository institutions overnight–around the target established by the FOMC.

The Discount rate : The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility.  Federal Reserve lending to depository institutions plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy.

The Federal Reserve Banks offer three types of credit to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured. The discount rate on secondary credit is higher than the rate on primary credit. The rate for seasonal credit is an average of selected market rates. Rates are established by each Reserve Bank’s board of directors

Reserve Requirements : The Federal Reserve Act authorizes the Board to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions. The Federal Reserve Act authorizes the Board to impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.

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. 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 & credit, ultimately the range of economic variables including employment, output and prices of goods & services.

Why is the meeting important for traders?

The FOMC, alongside the NonFarm Payrolls report, is a key indicator of the US economy’s health. Traders might use the committee’s decision to provide a broad context for their trading strategies. The FOMC’s decision has a direct impact on these specific trading instruments in particular:

• Dollar: If the FOMC decides to increase interest rates, demand may increase and the value of the dollar is likely to rise.
• Gold: If the dollar is strengthened by higher interest rates, this may cause gold’s value to decline. Traders could flock to gold if the FOMC’s outcome suggests a negative outlook for the US economy, because it is seen as a stable asset that holds its value throughout periods of turbulence.
• Indices: Share prices may be pushed down in the case of rising interest rates, meaning that US indices are subject to movements from speculation.
• Bonds: Rising interest rates may cause bonds to fall overall.

 

Since the US economy is the largest economy in the world, the repercussions from the FOMC’s decision can be felt worldwide.

Traders across the globe pay attention to the decision as an indicator of global economic trends, and an insight into how other central banks around the world might adjust their inflation policy.

How might traders adjust their strategy?

The volatility which surrounds the FOMC’s decision can be a source of potential trading opportunities. Day traders in particular might adapt their strategy to maximize on the shifts which occur both before and after the meeting.

Speculation weeks before the announcement are common, meaning that the markets may be prepared for either outcome. Those who prefer to follow long-term trading patterns should bear in mind that the FOMC’s decision may take a considerable amount of time to fully impact the economy.

By formulating a trading strategy which accounts for each meeting, traders might be able to maximize on the movements, whatever the outcome.

Are you ready to take a position on the next FOMC meeting? Trade the dollar, CFDs on US indices and movements on gold with tightest spread.

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