is a regular session held by the members of the Federal Open Market Committee, a branch of the Federal Reserve that decides on the monetary policy of the United States.
After deliberating on short-term monetary policy, the FOMC will decide on a target federal funds rate that they believe will achieve their aims.
After every FOMC meeting, a statement is released that offers guidance about the expected path of monetary policy, which should help forex traders steer the course better. A fairly recent development, this statement is released partially in order to reduce volatility in markets such as forex, as well as to provide greater transparency overall. However, this guidance also has a lot of force behind it to move markets, just as if it were an actual policy change, making it at times resemble a double-edged sword.
How does the Fed meeting affect traders?
The FOMC meeting is usually considered the most important date on any traders’ 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?
If the FOMC chooses to raise or lower interest rates, the effects will reverberate across global financial markets. Here are a few specific markets to watch out for:- Forex trading. Any interest change will play out on the US dollar, by far the world’s most traded currency.
Key market: EUR/USD - Indices trading. Higher rates tend to be bad for shares, while lower rates can be a boon.
Key market: the S&P 500 - Bonds trading. US bonds are often where the fallout from interest changes is felt most directly.
Key market: 10-Year T-Note Decimalised
Find out more about how the FOMC affects interest rates.
What is the federal funds rate?
The federal funds rate is the interest rate that banks charge each other for overnight loans, meaning that it effectively acts as the base interest rate for the US economy. Changes to the federal funds rate will impact short and long-term interest rates, forex rates, and eventually economic factors like unemployment or inflation. This, in turn, will play out across the global economy.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. These are open market operations, the discount rate, and reserve requirements.The FOMC is specifically in charge of open market operations, while the Federal Reserve Board is in charge of the discount rate and reserve requirements.
Open market operations
Open market operations are the buying and selling of government bonds on the open market.When the FOMC wants to decrease monetary supply it will sell bonds, taking money out of the economy and in turn raising interest rates. When it wants to increase money supply, it will buy bonds, injecting money into the economy and lowering rates.
The discount rate
As well as borrowing this money from each other at the federal funds rate, banks can borrow money directly from the Federal Reserve itself.The interest rate a bank will have to pay to borrow from the Fed is called the discount rate. A lower discount rate will encourage a lower federal funds rate, and vice versa.
Reserve requirements
Reserve requirements are the percentage of a bank’s deposits from customers that it has to hold in order to cover withdrawals.If reserve requirements are raised, then banks can loan less money and will ask for higher interest rates. If they are lowered, then the opposite happens.
Federal Reserve quantitative easing
Quantitative easing (QE)
is an extra measure that the Fed can apply in times of severe financial
crisis. It is usually only used once the above policy tools have been
exhausted – the federal funds rate is near zero, and economic growth is
still faltering. What does the Fed do next?
In function, QE looks fairly similar to open market operations. The
FOMC buys securities on the open market, injecting money directly into
the system. However, there are two key differences between the two:
- Different assets are bought. Instead of focusing on short-term bonds, the FOMC will usually buy longer term securities, to reduce rates over the long term as well as the short term
- The aim is different. While open market operations are intended to
lower the federal funds rate, QE purchases aim to massively increase
money supply by adding to the Fed’s reserves
After the 2008 recession, the Fed undertook a series of QE
programmes, pouring trillions of dollars into the US economy. However,
it’s unclear how much QE helped the US economy recover.
Fed meeting dates
The FOMC will typically meet eight times a year, although there is scope for additional meetings if required. While any policy changes are announced immediately, the meetings are always secret, with minutes released three weeks after each session.2018 FOMC dates
| Date |
Minutes released |
|---|---|
| 30-31 January |
21 February |
| 21-21 March* |
11 April |
| 1-2 May* |
23 May |
| 12-13 June* | 4 July |
| 31-1 July/August* | 22 August |
| 25-26 September* | 17 October |
| 7-8 November* | 29 November |
| 18-19 December* | 9 January |
*Meetings are tentative until confirmed at the preceding session.
FOMC key people
The FOMC is made up of seven members of the Federal Reserve Board, plus five Federal Reserve Bank presidents.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.
2018 committee members
| Member | Role | Monetary outlook1 |
|---|---|---|
| Jerome Powell, Board of Governors chair |
Federal Reserve Board | |
| Lael Brainard |
Federal Reserve Board | Dove |
| Randal K. Quarles |
Federal Reserve Board | Centrist |
| Unfilled |
Federal Reserve Board | |
| Unfilled |
Federal Reserve Board | |
| Unfilled |
Federal Reserve Board | |
| Unfilled |
Federal Reserve Board | |
| William C Dudley, New York, vice chair |
Federal Reserve Bank president | Centrist |
| Loretta J. Mester, Cleveland |
Federal Reserve Bank president | Hawk |
| Thomas Barkin, Richmond |
Federal Reserve Bank president | |
| Raphael W. Bostic, Atlanta |
Federal Reserve Bank president | Centrist |
| John C. Williams, San Francisco |
Federal Reserve Bank president | Hawk |
What are hawks and doves?
Analysts and traders will tend to categorise members of the FOMC into two categories: hawks and doves.Hawks are members who believe that interest rates should be high, in order to reduce inflation at the cost of economic growth. Doves believe the opposite – that interest rates should be low, to fuel employment at the risk of rising inflation.