November 29, 2021

FED, FOMC: How do they affect Forex Market?

FED, FOMC

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What is the FED?

The Federal Reserve System is the central bank of the United States. FED is responsible for USA’s monetary policy.

Thus, FED has to to promote effectively the goals of maximum employment, stable price, and moderate long term interest rate. Fed is also responsible for the financial system stability and the promotion of safety and soundness of individual financial institutions. Finally, the safety and efficiency of payment and settlement system, as well as the promotion of consumer protection and community development constitute Fed’s main concern.

The Federal Reserve System consists of 3 key entities.

  1. The Federal Reserve Board of Governors. It is a 7-member board responsible for two out of three tools of monetary policy. These tools are the discount rate and reserve requirements.
  2. The 12 Federal Reserve Banks, operating independently but supervised by the Federal Reserve Board of Governors.
  3. The Federal Open Market Committee is responsible for the third monetary policy tool, i.e. the open market operations.

Τhe Federal Reserve  influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks. In this way FED adjusts the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Accordingly, changes in the federal funds rate trigger a chain of events. Further, these events affect other short-term interest rates, foreign exchange rates, long-term interest rates. Finally, such changes affect a range of economic variables, such as employment, output, and prices of goods and services.

What is the FOMC?

As we have already mentioned Federal Open Market Committee is one of the 3 FED key entities. FOMC is responsible for open market operations.

The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions. It also determines the appropriate stance of monetary policy. Finally, it assesses the risks to its long-run goals of price stability and sustainable economic growth.

FOMC Minutes are released by the Board of Governors and serve as a clear guide to the future US interest rate policy.

How to trade US Dollar with the FOMC Minutes

Among other the Fed decides on the increase, decrease, or keeping interest rates at the same level. Federal Reserve’s decision always has a direct impact on the US Dollar. Speculation often occurs weeks in advance about what will happen with interest rates following the meeting. Predictions about the changes in rate and the aftermath of the announcement always affect markets.

However, traders must not rely only on the Fed to determine the direction of the greenback.

What FOMC minutes show?

If Fed increases interest rates, it sells US government securities to major financial dealers. Such dealers, in turn, would pay by transferring money to the Fed account. Thus, this drives to increasing supply of the US Dollar in the banking system. Hence US Dollar’s value is appreciated.

If Fed decides to decrease interest rates, this, respectively, will raise the supply of the US dollar in the banking system. It may also stimulate the economy although, at the same time, it depreciates the currency’s value.

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Sources: LQDFX, Investopedia, federalreserve.gov

PLEASE NOTE The information above is not investment advice.