The FOMC meeting is one of the most important events for financial markets, and many traders - whether they are trading stocks, currencies, commodities or bonds - will have that day marked in their calendar.
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve that meets eight times each year to discuss and make decisions about monetary policy. The FOMC minutes are released three weeks after each meeting, summarising the discussion and votes of the committee members.
In this article, we will explain what the FOMC is, why their meeting matters and how it can impact financial markets worldwide.
The Federal Reserve System is the central banking system of the United States.
The goal of the Federal Reserve is: maximising employment, stabilising prices, and moderating long-term interest rates.
The Federal Reserve Systems is governed by the board of governors or Federal Reserve Board (FRB). Meanwhile, the FOMC is responsible for determining the course of the Fed's monetary policy.
While the Board of Governors of the Federal Reserve System decides on the discount rate and reserve requirements, the Federal Open Market Committee (FOMC) makes decisions in regard to the open market operations. Those are the three tools through which the Fed controls the monetary policy in the United States.
The Federal Open Market Committee (FOMC) consists of a total of twelve members. There are seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York and four of the remaining eleven Reserve Bank presidents.
Rotating seats are assigned once a year and members are selected from one of the following banks: Boston, Philadelphia, Cleveland, Atlanta, Chicago, Richmond, Dallas, Minneapolis, Kansas City, St. Louis and San Francisco.
2022 Committee Members include:
The FOMC typically meets eight times a year. If required, additional meetings can be scheduled if needed.
At the meeting, the FOMC members discuss monetary policy changes, developments in financial markets, asses the current state of the economy, present their economic outlook and discuss open market operations.
While the FOMC is naturally focused on the state of the U.S. economy, there can be external factors that could be discussed as well, such as geopolitical tensions or global supply chain issues.
The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed.
The first FOMC meeting in 2022 was held on January 25-26.
For the rest of the year, we have the following FOMC meetings scheduled:
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Find below the main points from the most recent FOMC meeting in January 2022:
The FOMC decision can trigger high volatility across various markets, which can present traders with an increase in trade opportunities. While this is particularly interesting for short-term traders, all types of traders tend to pay close attention to the outcome of the FOMC meeting, as a surprise could have a longer lasting effect on the direction of markets.
Due to the central bank's effort to improve communication through forward guidance, there are not as many surprises as they were in the past. Nevertheless, traders should be aware of each FOMC meeting as it can impact them in various ways, even if they are not actively trading the event.
First of all, most traders will keep a close eye on the economic calendar and mark the most important events on their calendar.
Secondly, traders will try to get an understanding about the what the market is expecting from the event. Furthermore, they might do their own analysis and come to their own conclusion as to how the FOMC meeting could affect markets. Others will rely on analysis from professional market analysts or expert traders.
As volatility tends to pick up during FOMC meetings, and the cost of trading is increasing, it is important traders are aware of the meetings schedule.
Literally all major financial markets are affected by changing interest rates in the United States. The reason for that is that U.S. remains the largest economy in the world, and the U.S. Dollar the world's most important reserve currency.
Currencies: The U.S. Dollar is the most traded currency, so a change in U.S. interest rates will have a significant impact on the forex market. Rising rates generally lead to a stronger Dollar, while the prospect of lower interest rates tend to depress the Dollar.
Learn how to trade forex and understand the opportunities that the volatility of FOMC decision make.
Stock market: Rising interest rates generally have a negative impact on the broader U.S. stock market. Technology stocks are particularly sensitive to changes in interest rates. Meanwhile, an accommodative monetary policy (i.e. lower interest rates) will support the stock market.
Bond market: U.S. bonds tend to decrease in value when rates rise and vice-versa. The 10 year treasury yield is one of the most widely watched benchmarks.
Cryptocurrencies: While the impact of rising rates on cryptocurrencies isn't as clear as for the other markets, it is certainly possible that the low interest rate environment of the past years has fuelled speculation in the crypto space.
The FFR (Federal Funds Rate) is the interest rate that banks charge each other for overnight loans on an uncollateralised basis, which makes it one of the most important interest rate benchmarks in the financial markets.
The effective federal funds rate (EFFR) is published daily by the Federal Reserve Bank of New York and displays the effective median interest rate of overnight federal funds transactions conducted during the previous business day.
Meanwhile, the federal funds target rate is determined by the FOMC. The target rate is maintained by open market operations and interest rates on reserves. Changes to the federal funds rate can have a significant impact on a variety of financial markets, both short and long term.
The FOMC cannot directly tell banks at which rate they should lend money to other banks. However, they have several policy tools available to them to keep the rate within their preferred range.
Open market operations: The Federal Reserve frequently participates in financial markets by buying and selling government bonds in the open market. By selling bonds, the Fed is removing money from the system. By buying bonds, the Fed is adding additional money into the system.
Reserve requirements: The Federal Reserve can dictate the percentage from client's deposits that banks need to hold to ensure smooth operations. If reserve requirements rise, banks have less money available to loan to others. On the other hand, a lowering of the reserve requirements means easier access to money.
The discount rate: The interest rate that the Federal Reserve charges to commercial banks and other depository institutions on loans.
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