During the FOMC meeting, members discuss developments in the local and global financial markets, as well as economic and financial forecasts.
FOMC meetings are key events in the financial markets and for traders, are considered one of the most important events on the economic calendar.
The Federal Open Market Committee meetings are important to forex traders because this is when the Federal Reserve, the central bank of the U.S., announces their decision on interest rates.
This announcement has a significant impact on the U.S. dollar.
What is the FOMC?
The FOMC, or Federal Open Market Committee, is the Federal Reserve System’s body for monetary policymaking.
In December 1913, the Federal Reserve System (“the Fed”) was created by President Woodrow Wilson and the US Congress to act as the Central Bank of the United States.
The Fed’s purpose is to try to achieve stable prices while maximizing employment. Generally, the FOMC enacts policy by altering short-term interest rate levels based on economic outlook changes.
Since 2009, the FOMC has also used large-scale purchases of securities (known as “QE“) to improve economic conditions and support financial recovery by lowering long-term interest rates.
The Federal Reserve controls three monetary policy tools:
- Reserve requirements
- The discount rate
- Open market operations
These tools allow the Fed to influence the supply of and demand for balances held at Federal Reserve Banks by depositary institutions and which affects the interest rate.
An FOMC rate decision has a significant effect on other economic variables, including foreign exchange rates, short-term interest rates, the price of services and goods, and even employment.
The main FOMC meetings take place eight times per year, but they hold other meetings as necessary.
The Committee publishes the minutes of these regular meetings three weeks after the policy decision’s date.
Members of the FOMC
The Federal Open Market Committee has 12 members.
Of these, seven are members of the Federal Reserve System’s Board of Governors, while the remaining five are Federal Reserve Bank presidents.
The Chair of the Board of Governors also acts as the chairman of the FOMC, by tradition.
The President of the Federal Reserve Bank of New York holds the position of Vice-Chairman for the FOMC.
The Federal Reserve Bank of New York’s seat is the only permanent position.
The other four presidents serve for one year on a three-year rotating schedule.
Every year, a new Federal Reserve Bank president is chosen from the following geographical groups:
- Richmond, Boston, and Philadelphia
- Chicago and Cleveland
- Dallas, Atlanta, and St Louis
- Kansas City, San Francisco, and Minneapolis
This system ensures that all areas of the United States are represented in the FOMC.
Even though the remaining seven presidents of the Federal Reserve Bank are not designated FOMC members, they still attend the meetings and provide their input.
In the FOMC meetings, developments in global and local financial markets are discussed, as well as financial and economic forecasts.
While all participants can share their views on the state of the economy and recommendations for monetary policy, only the designated members of the FOMC can vote on which policy will be adopted.
Why are FOMC Meetings important?
The FOMC’s decisions on interest rates have a significant effect on the U.S. dollar.
Being aware of the scheduled dates for FOMC meetings and knowing whether there is a Fed meeting on the day allows you to be prepared for the crazy volatility that might occur in the markets.
You might prefer to steer clear of the market until the FOMC meeting result is published, or you might have a bias on what the Fed will do and want to stay in the market and trade this bias.
It’s not enough to be aware of the meetings though.
You also need to monitor the FOMC by reading the FOMC minutes and watching any press conferences.
These can often provide important clues regarding the possible direction of the U.S. dollar in the near future.
For example, if the FOMC states the Fed is adopting a hawkish stance, you might consider going long the USD.
if they adopt a dovish stance, you might want to go short the USD.
What is a “Hawkish Stance”?
A hawkish stance means that the Fed is attempting to keep the inflation rate in check.
While economic growth is generally a good thing, if the rate is too fast, it can cause problems.
When the economy grows too quickly, prices go up and people spend less money. The rise in prices is called inflation. If inflation rises too fast, this could lead to the economy slowing down.
To keep inflation in check, the Fed enacts various policies, one of which is to raise interest rates.
When interest rates rise, borrowing becomes more expensive. This causes consumers and businesses to borrow less, which causes them to spend less.
The key is to achieve balance so that the economy isn’t growing too quickly, but it isn’t stagnating either.
What is a “Dovish Stance”?
A dovish stance means that the Fed is attempting to prevent deflation and avoid economic contraction.
The Fed implements various policies and strategies designed to stimulate the economy and to stop prices from dropping too low.
The main approach they take is to lower interest rates.
Low interest rates encourage people to spend money and business to expand because loans are cheaper.
How Dovish or Hawkish Stances Affect Forex Traders
The Fed reveals whether its stance is either hawkish or dovish after the FOMC meeting.
Remember, a hawkish stance means the Feed wants to hike interest rates, while a dovish stance means the Fed wants to cut interest rates.
An easy to remember this is to rap to yourself, “Hawks gonna hike. Doves gonna cut.”
If the Fed announces a dovish stance, the market expects them to lower interest rates in the future.
A lower interest rate is usually bearish for the U.S. dollar.
Keep in mind though that many other factors also influence the value of a currency.
You also have to factor in interest rate differentials between other countries.
For example, if the Fed reduces interest rates but U.S. interest rates are still higher than in other countries, the U.S. dollar may not even budge.
If the Fed was dovish but wasn’t as dovish as the market expected them to be, the U.S. dollar may even go up!
In contrast, if the Fed adopts a hawkish stance, they are likely to raise interest rates.
A higher interest rate is usually bullish for the U.S. dollar.