
What
is FOMC?
In the world of economics, there are two
big components that traders need to be aware of: monetary and fiscal policy.
The first one involves managing the money supply and interest rates, while the
second refers to how governments invest money.
The Federal Open Market Committee or FOMC
is part of the U.S Federal Reserve in charge of controlling the money supply
and monetary policy. During Fed meetings, the board can announce interest rate
decisions, which can result in either buying or selling U.S government
securities and thus helping the economy grow.
What
is the structure of the FOMC?
There are twelve members with voting
rights inside the FOMC: Chairman Jerome Powell, Vice Chairman John C. Williams
and the members of the Board of Governors (Richard H. Clarida, Randal K.
Quarles, Michelle W. Bowman, and Lael Brainard), alongside four other bank
presidents (Patrick Harker - Philadelphia; Robert S. Kaplan - Dallas; Neel
Kashkari - Minneapolis and Loretta J. Mester - Cleveland). Alternate members
who serve on a rotating basis with one-year terms: Thomas I. Barkin -
Richmond, Raphael W. Bostic - Atlanta,
Mary C. Daly - San Francisco, Charles L. Evans - Chicago, and Michael Strine -
First Vice President, New York.
The rotating seats are chosen from four
groups of Banks, one Bank president from each group: Boston, Philadelphia, and
Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and
Minneapolis, Kansas City, and San Francisco. Additionally, nonvoting Reserve
Bank presidents also attend the meetings of the Committee, participate in the
discussions, and contribute to the Committee's assessment of the economy and
policy options.
Role
of FOMC - Scheduled meetings
The Federal Open Market Committee (FOMC)
normally has eight scheduled meetings per year. They also might hold additional
meetings should the situation require. Because talks are secret, there is
usually plenty of speculation on Wall Street regarding monetary policy
decisions and fund rates.
During these meetings, the committee
analyzes past and current economic developments to make well-informed
decisions. A lot of important factors are taken into account here, including
trends in prices and wages, consumers’ income and spending habits, interest
rates, GDP growth, lending trends, and fiscal policy.
Essential decisions are stated during a press
conference shortly afterward when the federal funds rate is also announced. The
FOMC minutes are released after the meeting.
Federal
funds rate
The federal funds rate refers to the
interest rate that banks charge each other for overnight loans. In short, it
reflects the base interest rate for the US economy. Any changes to the federal
funds rate affect short and long-term interest rates, forex rates, and economic
factors such as unemployment or inflation.
Key
term - quantitative easing programs (QE)
The QE happens when other policy measures
have failed to provide results, and the Federal funds rate is very low. In such
a scenario, U.S Central Bank buys government securities or other securities
from the market to increase the money supply and support lending and
investment.
These measures stimulate the economy,
banks can loan more and replace the sold assets with newer ones, thus
re-establishing the normal economic flow.
FOMC
impact on the financial markets
The FOMC meeting is one of the most
important events in any trader’s agenda for one very important reason: interest
rates. Whenever the FOMC lowers or raises interest rates, the global financial
markets feel the effects. Here’s why and how:
Currency
pairs linked to the USD
Higher interest rates provide support for
the world’s most traded currency - the US dollar - while lower interest rates
have the opposite effect. The major dollar currency pairs tend to move as a
consequence, including EUR/USD, GBP/USD or USD/JPY.
Indices
& Bonds
Increasing interest rates affect consumer
and business spending. US indices such as Dow Jones, S&P 500, or VIX are the first to feel
the heat. Bonds such as the 10 Year Note
also tend to react to interest rate decisions, falling when rates go up and
increasing when rates go down.
Commodities
The greenback has an impact on
commodities such as precious metals and oil. A weaker dollar leads to higher gold, silver, and crude oil prices. As a side
note, gold is a favorite safe-haven asset for traders, who usually opt to
invest in it when the dollar tumbles out, and the economy falls.
Sources:
investopedia.com, federalreserve.gov
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Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.
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