Fundamental analysis is very useful for forex traders in making decisions when trading. This fundamental analysis can be in the form of economic news, policies, politics, events, and others that can affect the value of a currency. One of the fundamentals that can affect currency values and market movements is the FOMC. The FOMC, stands for Federal Open Market Committee, is the policy meeting board of governors of the United States central bank. The FOMC meeting will formulate changes or improvements to US monetary policy, including discussing interest rates, the money supply, monetary stimulus, deciding to buy or sell stocks and government bonds, and others.
They produce policies that tend to have a global impact. Therefore, the FOMC meeting is a meeting that produces important announcements on a wide scale for investors. Structurally, the FOMC is a committee consisting of high-ranking officials of the United States central bank or the Federal Reserve (The Fed). In summary, these meetings affect the movement of the world economy because currently the Fed is the head of US monetary policy. And, of course, the value of the US dollar is very decisive globally. The FED meeting date can usually be seen in the FED meeting schedule or FOMC Calendar.
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Short History of The FED
During the British colonies invasion in the United States, in 1775 the United States revolution began. One of the reasons was that King George III of England violated the interest-free currency of the American colonies and was produced by the colonies for America’s own use, and forced them to borrow money from the central bank in England at interest. They immediately left the American colonies in debt. This is one of the causes of the American revolution from the grip of the British colonies.
In 1913, the bankers decided that there was a currency shortage in the United States, and the government could no longer issue currency because all of its gold reserves had been used up. In order to have additional circulation of money, a group of people founded a bank called “The Federal Reserve Bank of New York” which later became popular with the acronym The Fed then became the federal reserve system.
How FOMC and FED Meeting Affect Your Trading
In the FOMC meeting, the decisions formulated at this meeting are for the United States only by the reserve board. However, this decision will affect the fluctuations in the value of the USD which is the reference currency in the world. Thus, the value of other currencies will be affected. In addition, the results of the meeting’s formulation can also affect the volatility of stocks on the US stock exchange, bond yields, and others related to financial markets. Thus, investors will use the results of the formulation of this meeting as a consideration for their investment decisions. That’s why it is important for traders to find the information of the FOMC meeting schedule from the FOMC Calendar.
The Terms Related to The Impact of FOMC Decisions
The tool used to carry out monetary policy is open market operations. The Fed is able to buy or sell some government bonds on the financial markets. Discount rate is the second tool used. This is the interest charged on banks that make short-term loans to the Fed. Two terms related to FOMC decisions that you need to know to understand the impact of FOMC meeting decisions such as fed funds rate and federal funds.
The first term after the meetings is Hawkish. This term to understand what the FOMC is indicating that the FOMC decision favors or is in favor of monetary tightening. An increase in interest rates (FED Rate/FFR) and/or a reduction in monetary stimulus. A hawkish tone tends to indicate the strengthening of the US dollar. The opposite term is Dovish or turning from hawkish. Dovish explained that the FOMC decision is leaning towards monetary easing. There was a decrease in the FED Rate, and/or an increase in monetary stimulus. The dovish tone led to the weakening of the US dollar.
A hawkish decision after meetings will usually encourage the strengthening of the US dollar. On the other hand, a dovish decision will usually encourage the weakening of the US dollar. In forex, if the FOMC takes a hawkish tone, the USD will strengthen and market sentiment towards the USD will tend to be bullish. If the USD strengthens, it will result in other currencies that are opposite the USD in one pair will experience a weakening or decline.
On the other hand, if the FOMC takes a dovish decision, the USD will tend to weaken or decline. The decline in the USD could be sharper when these FOMC decisions are unpredictable by the market. However, if investors are able to predict this decision, then the USD cannot fall too far or even have the potential to strengthen due to profit taking.
What Traders Have to Do After the FOMC and FED Meeting?
In forex trading, the best way to anticipate the Federal Open Market Committee (FOMC) meetings that will result in a Federal Reserve interest rate decision amid uncertainty is to wait. There is no doubt that the announcement of interest rates this time has the potential to trigger market volatility. Moreover, after that Jerome Powell, the current Fed Chair, will give an official statement that will be used as a guide by market participants, and will affect the USD.
Almost all business sectors in the United States (US), especially housing, are the scenarios that will be run by the FOMC. Based on the latest survey conducted by Bloomberg, 50% of economists believe that the Fed will raise interest rates, and 50% expect no change. Nonetheless, there is likely to be a surprise upside of 25 basis points. It was possible, although no one dared to confirm this. Unfortunately, trading based on the Fed’s rate decisions is not simple.
At these FOMC meetings, the FED will also release economic projections along with the interest rate decision and will be followed by a press conference by Jerome Powell. We’ll probably see a market reaction soon after the announcement, followed by a slight correction and then price consolidation before Yellen holds her press conference. By the time the press conference ends, the USD is likely to start moving in a certain direction, and that’s the real reaction of the market.
There are at least three things to note in the announcement which are interest rate, hints from the official FED statement and economic projection. Those three factors are possible to be followed by these four scenarios and their effects on the USD. The first one is that interest rates rose but there is an implication that the increase is the last of the year. It may cause USD will strengthen at first then corrected. The second is there is no increase in interest rates but there are indications that an increase in interest rates will be carried out next year. This scenario is possible followed by USD weakening but likely will be followed by a long strengthening.
The third scenario that could happen after the meeting’s decision is there is no interest rate hike and there is no indication when the rate hike will be implemented. It has the possible effect of USD weakening in the next few days. The last scenario that might happen is an increase in interest rates and there are indications that next year there will be another rate hike, if the US economy continues to strengthen. It may be followed by a USD strengthening rally, and may last for several days.
Current FED Decision in 2021
The current FED decision was held during meetings in June in the year 2021. The United States Central Bank or The Federal Reserve (The Fed) is predicted to raise interest rates only in 2023. This prediction is based on interest rate estimates, from the results of the meeting of members of the Federal Open Market Committee (FOMC). The results of the FOMC meeting showed, about 13 of the 18 members believe the Fed will raise interest rates at least twice in 2023. Only five of the FOMC members still see the Fed will maintain current interest rates until the end of 2023.
While seven of the 18 FOMC members believe the Fed is likely to raise interest rates in early 2022. Previously, at the FOMC meeting in March 2021, four of the 18 members predicted some point in the Fed’s rate hike in 2022. While seven FOMC members saw a new rate hike the Fed would enact in 2023. Here traders can see and prepare for further inflation expectations.