Ever wonder how your life could have changed without you knowing by these individuals? The FOMC members meet regularly to decide monetary policies, control the money supply, and direct the growth of our economy and ultimately our standards of living.
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What is FOMC
The FOMC stands for Federal Open Market Committee, a branch of the Federal Reserve System. The committee is in charge of setting monetary policies for the United States with the main objectives of stabilizing prices and achieving maximum employment.
Open market operations (OMOs) are the primary tools the FOMC uses to manage the cost of money and the amount of money circling in the economy, thus altering interest rates.
The 12 voting members consist of:
– 7 members of the Board of Governors
– 4 Reserve Bank Presidents on a rotating basis
– the President of the Federal Reserve Bank of New York
There are 12 Reserve Banks in the United States. Their respective presidents take turns to be on the committee with the exception of the President of the Federal Reserve Bank of New York (they will always be on the committee).
- Jerome H. Powell, Board of Governors, Chair
- John C. Williams, New York, Vice Chair
- Michael S. Barr, Board of Governors
- Michelle W. Bowman, Board of Governors
- Lael Brainard, Board of Governors
- James Bullard, St. Louis
- Susan M. Collins, Boston
- Lisa D. Cook, Board of Governors
- Esther L. George, Kansas City
- Philip N. Jefferson, Board of Governors
- Loretta J. Mester, Cleveland
- Christopher J. Waller, Board of Governors
The Fed members meet to discuss national and global economic developments and decide on monetary policies to meet targets on price stability, inflation, and unemployment.
> Inflation Target
The inflation target of the Fed is 2% over the long run. However, the rapid recovery post-pandemic coupled with the Ukraine-Russian war sent commodities prices flying, especially oil and gasoline to unsustainably high levels, leading to record inflation in major economies, including the U.S.
Therefore, the Fed has been extremely hawkish in executing their quantitative tightening as of late, raising interest rates aggressively to cope with runaway inflation.
The Fed has also revised its inflation target to an average instead of a fixed figure. With an inflation target average of 2%, it allows room for fluctuations around that level. Periods of low inflation will make up for periods when inflation rises above 2%. This helps ensure the long-run inflation is secured steadily at 2%.
> Unemployment Target
One of the Fed’s Dual Mandates is maximum employment. It refers to the maximum level of employment that the economy can keep up over a period of time without causing excessive inflation.
It is important to note that zero unemployment is impossible for the following reasons:
- There are always new job seekers entering the market
- It takes time to look for new jobs after leaving the old ones
- Businesses cease operations and new ones pop up all the time
- The rise and fall of specific sectors
Thus, there is no fixed numerical target for the unemployment rate. Instead, a large number of factors and metrics are taken into account by the Fed to come up with policies that contribute to and maintain maximum employment.
The Fed Meet
FOMC meetings are held 8 times per year, once every 6 weeks. Extraordinary meetings will also be held if there need be.
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Can we spectate the meeting?
FOMC meetings are conducted in private. However, the FOMC minutes will be released 3 weeks after the meetings. You can find them here.
The Federal Reserve has three tools to implement monetary policies namely:
– Open Market Operations (the buying and selling of securities in the open market by a central bank)
– Adjusting discount rates and the Federal Funds Rate
– Determining reserve requirements for depository institutions
In times of subpar economic growth, the Fed can implement expansionary monetary policies:
1. Open Market Operations – Buying more government bonds in the open market
2. Reserve Requirements – Decreasing the amount of money that financial institutions have to keep in their vaults or at a reserve bank
By buying government bonds, the central bank injects more money into the economy, increasing the money supply and decreasing the interest rates. The cost of borrowing and credit decreases, stimulating more borrowing, investing, and spending, and hence economy begins to grow.
The same can be said for the reduction in reserve requirements. When banks are required to keep lesser money in the vaults, they now have more money to lend out, thus increasing the money supply and bringing down the interest rate.
The opposite is true for contractionary monetary policies.
Why Should I Care As a Trader?
FOMC meetings are always in the spotlight since there are widespread financial implications on what they say or didn’t say or what they do or didn’t do. Thus, market volatility usually picks up around these times.
Market expectations on FOMC’s future decisions are key to setting the sentiment and mood of the markets. Most times these expectations are priced in and hence it is critical to chime into what the majority of traders are thinking.
The Federal Funds Rate is announced during the FOMC meetings. This rate subsequently affects other interest rates and is passed on to you and I. It will either increase or decrease the costs of living from housing mortgages, business and personal loans to attractiveness of alternative investments. We then adapt our consumption and spending habits and ultimately lead the economy to where the Fed sees optimal.
Mark the dates on your calendar as you do not want to get caught in the turbulence. For conservative traders, it is best to sit on your hands and wait for the waves to calm down. However, if you are interested in trading the news, read How To Trade Key Events
Traders should pay attention to when the Fed members speak as they might drop hints on their stances on future economic policies. If the majority of the Fed Members are hawkish, we can expect more tightening to come and vice versa.
We can also check the Fed Rate Monitor Tool to determine the respective probability of the upcoming rate hike (or not). Will it be a no-hike situation or a 25bps hike? Or maybe a 50bps?
Related: Navigating Volatile Markets
Which Forex Pairs Are Affected The Most?
FOMC sets the federal funds rate which directly determines the attractiveness of the US Dollar. As the interest rates increases, it makes more sense for investors to keep their assets in USD instead of other currencies. Demand for the greenback goes up and hence its relative value.
With that being said, all pairs that are traded against the US Dollar will be affected the most.
For example, the EURUSD, GBPUSD and USDJPY are at the forefront since they are the top 3 most traded forex pairs worldwide.
Apart from that, the Canadian dollar, Mexican Peso and Chinese Yuan are also sensitive to any changes in USD’s outlook since they are the 3 biggest trading partners with the United States .
Source: Wikipedia 
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