The Federal Reserve is the most important central bank in the world because of the special role the US dollar plays as a reserve currency. Therefore, it is important to you as a trader to always pay close attention to FOMC meetings and activities.
First, What is FOMC?
The Federal Open Market Committee (FOMC) is one of the most important items in the economic calendar. It is a special committee of the Fed chaired by the Fed Governor, whose role is to analyze the economy and conduct the necessary monetary policy.
These analyses and conductions are done during the FOMC meetings, which are scheduled – and often impromptu. The scheduled meetings are held every month without a specific frequency.
The FOMC decision is among the most important events in the economic calendar. Important because of how it influences the market in the long run.
Why Is the FOMC Meeting Important to You as a Trader?
The major reason the FOMC meeting is usually considered the most important date on any traders’ calendar is because of INTEREST RATES. Thanks to its policy tools, the FOMC can raise or lower the federal funds rate in the US.
This change in rate will trickle down to other interest rates, including FX rates and bond prices, which can have a big impact on traders. In other words, if the FOMC chooses to raise or lower interest rates, the effects will reverberate across global financial markets.
Major markets that experience this hit are:
- Forex trading
- Indices trading.
- Bonds trading, and
- Gold trading.
Inarguably, the US economy is the largest in the world. Therefore, repercussions from the FOMC decision could be felt worldwide. And this is why you, as a trader, have to pay attention to the FOMC decision. It is a major indicator of global economic trends.
Likewise, you can also receive insight from the FOMC decisions into how worldwide central banks may adjust inflation policies.
What Happens at FOMC Meetings?
FOMC Meetings are hosted primarily to discuss interest rates and other financial concerns. Two major purposes of the meeting are to determine what intervention steps are necessary and to review the existing economic data.
Each FOMC meeting has five Federal Reserve Bank presidents and seven governors of the board sit and discuss the monetary policy for the United States and decide what to do. Though the meeting is private, key decisions get announced at a special press conference once everything is finalized and finished.
The minutes of these meetings get released three weeks after they’re held. Typically, these reports record the main decisions of the meeting and explain the reasoning behind them.
If you prefer long-term trading patterns, be aware that the FOMC decision could take time to impact the economy fully.
What Tools Does the FOMC Use to Influence the Financial Markets?
Of course, as mentioned earlier in this article, the FOMC are strongholds that can influence the market. But the big question is, How Do They Do It?
Here are the tools the FOMC uses to influence the markets:
- Federal Funds Rate
- Quantitative Easing
- Reserve Repurchase Agreements
- Primary Credit Rate
- Reserve Requirements
- YCC (Yield Curve Control)
Top Tips for Trading the FOMC Meetings
Here are expert-proven tips you should consider when trading around FOMC meetings:
1. Know the Meeting Date
You can know this on the Federal Reserve website. Apart from the announcement of the press conference and policy statement, check out the date and time when the meeting minutes will be released.
2. Have a Strategy Before the Announcement
Your strategy should detail how you will react to the outcome of the FOMC meeting. What are your market expectations? How do you think the market will react to whatever announcement the FOMC makes?
You can create your strategy based on analysis and opinions from commentators, alongside the comments from previous recent FOMC meetings.
3. Have a Risk Management Plan
Risk management applies everywhere. You can’t forget about the risk management basics when trading during an FOMC meeting. Use take-profit and stop-loss orders, and make sure you don’t put more than you can afford to lose on a single trade.
4. Think Long-Term
You don’t necessarily have to trade based on the announcement on the day it’s made. Most of the FOMC decisions take time before influencing the markets and economy. Continue with your long-term strategy, and don’t rush things because other traders are. Remember, your strategy is not their strategy.