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.
As one of the key gauges of the future of the US economy, the FOMC 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 may arise from the talks.
We’ve collated all the information you need to help you to plan ahead: what is the FOMC and what does it do, what trading opportunity the FOMC meeting can present, and an updated FOMC scheduled for 2023.
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What is the FOMC?
The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members--the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.
The Board chair serves as the Chair of the FOMC; the president of the Federal Reserve Bank of New York is a permanent member of the Committee and serves as the Vice Chairman of the Committee. The presidents of the other Reserve Banks fill the remaining four voting positions on the FOMC on a rotating basis.
All of the Reserve Bank presidents, including those who are not voting members, attend FOMC meetings, participate in the discussions, and contribute to the assessment of the economy and policy options. Analysts will sometimes classify FOMC members as monetary hawks and doves with the aim of predicting the outcome of meetings.
By law, the Federal Reserve (FED) conducts monetary policy to achieve its macroeconomic objectives of maximum employment and stable prices. Usually, the FOMC conducts policy by adjusting the level of short-term interest rates in response to changes in the economic outlook.
Since 2008, the FOMC has also used large-scale purchases of Treasury securities and securities that were issued or guaranteed by federal agencies (quantitative easing) as a policy tool in an effort to lower longer-term interest rates and thereby improve financial conditions and so support the economic recovery.
>> See the current list of all FOMC members
The FOMC schedules eight meetings per year, one about every six weeks or so. The Committee may also hold unscheduled meetings as necessary to review economic and financial developments.
The FOMC issues a policy statement following each regular meeting that summarizes the Committee's economic outlook and the policy decision at that meeting. The Chairman holds a press briefing after each FOMC meeting to discuss the FOMC's policy decisions and to provide context for those decisions. The Chairman also discusses the economic projections submitted by each FOMC participant four times each at the press conference following the last scheduled FOMC meeting of each quarter.
A full set of minutes for each FOMC meeting is published three weeks after the conclusion of each regular meeting, and complete transcripts of FOMC meetings are published five years after the meeting.
What happens in the meeting?
Every FOMC scheduled meeting sees seven governors of the board and five Federal Reserve Bank presidents discuss and decide on monetary policy for the US. The meeting ultimately has two main purposes: to review existing economic data and, in light of this, to decide what kind of intervention is necessary.
The committee’s decision considers huge quantities of data including household spending, business fixed investment, inflation, and employment growth. While the meeting is entirely private, the key decisions are announced at a press conference shortly after the meeting has finished.
Three weeks after the FOMC has passed, the minutes are published in full. The FOMC ultimately seeks to stabilize the economy by raising or lowering interest rates.
Using a wealth of economic data allows the committee members to evaluate whether they want to drive or slow inflation in relation to the money supply and the target inflation rate of 2 percent.
Each meeting date is tentative until confirmed at the meeting immediately preceding it:
* Meeting associated with a Summary of Economic Projections. For more details about the FOMC schedule visit the official website of the Federal Reserve.
What Does the FOMC Do?
The FOMC works with the Federal Reserve Board of Governors to control the four tools of monetary policy: the reserve requirement, open market operations, the discount rate, and interest on excess reserves. The FOMC sets a target range for the fed funds rate at its meetings. The Board sets the discount rate and reserve requirement.
The FOMC uses its tools to attain maximum employment and stable prices. To achieve that, it must manage unemployment and inflation.
President Joe Biden wants the Fed to expand its purpose to include closing racial and economic gaps. He'd like Congress to amend the Federal Reserve Act to require the Fed to include these in its scope. Biden would ask the Fed to require faster check clearing, better help low-income families, and to achieve greater diversity in its hiring practices.
The Fed's Economic Targets
The Fed's target inflation rate is 2% over time. It wants prices to increase by 2% each year. When that happens, people expect inflation. It motivates them to buy now rather than later. A mild inflation rate spurs demand, and that's good for economic growth.
The FOMC no longer has a definitive target for the natural rate of unemployment. Before the 2020 recession, unemployment was historically low without triggering inflation. Instead, the Fed now reviews a broad range of information rather than relying on a single unemployment rate target.
How the Fed Implements Monetary Policy
To reduce unemployment, the FOMC uses an expansionary monetary policy. That boosts economic growth by increasing the money supply and lowers rates to spur economic growth and reduce unemployment.
If the economy grows too fast, then prices rise, causing inflation. To fight inflation, the FOMC uses a contractionary monetary policy. That makes money more expensive, slowing the economy down. A slower economy means that businesses can't afford to raise prices without losing customers. They may even need to lower prices to gain customers. This combats inflation.
The Committee adjusts interest rates by setting a target for the fed funds rate. This is the rate that banks charge each other for overnight loans known as fed funds. Banks use the fed funds loans to make sure they have enough to meet the Fed's reserve requirement. Banks must keep this reserve each night at their local Federal Reserve bank or in cash in their vaults.
Although the FOMC sets a target for the fed funds rate, banks actually set the rate themselves. The Fed pressures banks to conform to its target with its open market operations. The Fed purchases securities, usually Treasury notes, from member banks. When the Fed wants the rate to fall, it buys securities from banks. In return, it adds to their reserves, giving the bank more fed funds than it wants. Banks will lower the fed funds rate to lend out this extra reserve.
Conversely, when the Fed wants rates to rise, it replaces the bank's reserves with securities. This reduces the amount available to lend, forcing the banks to increase rates.
How Does the FOMC Affect You?
The FOMC meeting is usually considered the most important date on any trader’s calendar, for one overriding reason: interest rates.
Using a trio of policy tools, the FOMC can raise or lower the federal funds rate in the US.
This central rate change will trickle down to other interest rates, including FX rates and bond prices, which can have a big impact on traders.
Which markets are affected by the FOMC?
The FOMC, alongside the Non-Farm 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:
If the FOMC decides to increase interest rates, demand may increase and the value of the dollar is likely to rise.
Euro/Dollar forecast & price predictions Pound/Dollar forecast & price predictions Turkish Lira/Dollar forecast & price predictions
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.
Share prices may be pushed down in the case of rising interest rates, meaning that US indices are subject to movements from speculation.
Rising interest rates may cause bonds to fall overall.
Since the US economy is the largest economy in the world, the repercussions of 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.
What trading opportunity does the FOMC meeting present?
The FOMC meetings and subsequent policy statements give a clear indicator of the state of the US economy. The announcement typically produces strong market movements in all areas, from equities to bonds and commodities such as gold.
As a result, long-term traders can reformulate strategies around higher or lower interest rates, more bond purchasing or quantitative easing, expectations of higher or lower inflation, and the overall economic outlook. Traders anticipating higher interest rates could increase their exposure in banks and financial stocks, and lower exposure in high dividend-paying sectors such as utilities or bonds.
The FOMC’s discussions and announcements over the economic outlook and the direction of inflation could also mean a switch from growth stocks to value stocks, as value stocks tend to be preferred by investors in periods of economic uncertainty because they offer more stable long-term investments. Growth stocks on the other hand tend to perform well under stronger economic conditions. There are also opportunities for day traders to take advantage of volatility in the markets, both prior to the announcement and immediately afterward.
Traders can also analyze the tone of the FOMC announcement to determine whether there are more hawks than doves among its members and whether that balance has changed since the last meeting. A hawk favors higher interest rates to tackle inflation and growth, while a dove favors a lower interest rate to support growth and inflation.
5 top tips for trading on FOMC meetings
Know when the meeting is happening. Check out the FOMC schedule on the Federal Reserve website. Look for the time of the policy statement and press conference announcement, as well as the date and time when meeting minutes are released. Keep checking the website regularly for news and sign up to the Federal Reserve Twitter feed, just in case there are any unscheduled meetings announced. Devise a strategy ahead of the announcement. What are the market expectations? Read analyst opinions and media commentators. Analyse recent economic and financial performance, comments from past meetings, and the latest FOMC forecast on rate hikes or cuts. Ask yourself the following questions: how would you react if interest rates were cut or hiked; are you ready to change the strategy depending on the decision?
Understand risk-management. Don’t forget the basics of risk management when trading at FOMC meetings. That means using stop losses and take-profit orders, as well as the key money management rule to avoid having more than 1% of your capital in a single trade. React to volatility. Because of forward guidance, there is perhaps less volatility around an FOMC announcement than in the past, but it is still present and can be significant. Get ready to trade if, for example, rates are changed or expectations of a cut or raise are not met. Wait for the market’s initial reaction to the announcement to pass, and find the real direction of travel after things have calmed down. Think long-term. You don’t have to trade the announcement on the day itself. Often, the decisions taken by the FOMC take time to influence the economy and the markets. Continue your long-term trading strategy, and don’t do anything rash just because of other traders.
The volatility that surrounds the FOMC’s decision can be a source of potential trading opportunities. Day traders in particular might adapt their strategy to maximize the shifts that occur both before and after the meeting.
Speculation weeks before the announcement is 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 that accounts for each meeting, traders might be able to maximize the movements, whatever the outcome.
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