LeapRate Exclusive… The Federal Open Market Committee (FOMC) is a branch of the Federal Reserve that is responsible for discussing and establishing US monetary policy. They meet eight times a year (although they can meet more frequently if needed) to debate any necessary policy changes. Most traders mark these dates on their economic calendars due to their impact on the markets, and there is always a buzz of anticipation as these meetings approach.
The meetings are held in almost complete secrecy, with only five Federal Reserve Bank presidents and the seven governors of the board permitted to attend. A press conference is held immediately afterwards to announce a summary of the findings and agreed actions to be taken (if any). The full minutes of the meetings, which go into far more detail, are not released for a further three weeks. Depending on the outcome, the markets may well react with volatility.
The reason for this flurry of market movement centres on interest rates. Potential changes to interest rates can cause the markets to rise or fall. In response to a comprehensive analysis of US economic data, the FOMC decide if any intervention is required to raise or lower interest rates depending on the country’s money supply and whether prices require stabilizing. The Fed aims to maintain an inflation rate of 2% per year.
The conclusions drawn from these meetings therefore provide investors with a glimpse into the official opinion of the US economy’s health in general, as the committee takes several factors into account including – but not limited to – the unemployment rate, job gains, household spending and inflation itself.
Due to the fact that the US economy is the largest in the world, the consequences of these meetings are far-reaching – making it an influential economic event around the whole globe.
In terms of specific financial instruments, there are four major asset classes that are directly affected by the FOMC. These are:
- Indices. Elevated interest rates can put strain upon both business and consumer spending, which in turn lower share prices. This makes indices particularly sensitive to the FOMC’s assessments.
- Bonds. Bond prices rise when interest rates fall. Conversely, bond prices fall when interest rates rise.
- Dollar currency pairs. A currency’s value is often increased when interest rates rise. This is due to the fact that a high interest rate can be extremely appealing to foreign investors, so demand for that currency is heightened.
- Gold. A weakened dollar can effectively buoy the metal’s value due to their inverse relationship. Another important factor to consider is that gold is considered a safe-haven asset. Should the FOMC announcement invite negative speculation about the US or global economy, the metal’s appeal is likely to jump.
A day trader with a solid awareness of market sentiment may find opportunities in the speculation surrounding the FOMC meeting. Should there be any unexpected revelations and subsequent volatility, an organised trader can not only protect his capital, but even potentially profit if he is prepared to respond quickly.
The article has been exclusively prepared for LeapRate by the retail forex broker FXTM.