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Learn to Trade FOMC

The Federal Open Market Committee (FOMC) is a key part of the Federal Reserve that sets the direction of monetary policy.

By Bhagirath RoyPublished 2 years ago 3 min read
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Learn to Trade FOMC
Photo by Pepi Stojanovski on Unsplash

The committee meets at various times of the year to decide whether to maintain or change current monetary policy. A decision to introduce changes to current policy would result in the purchase or sale of US government bonds on the open market to support economic development.

FOMC Structure

I. Its Board consists of her seven members appointed by the President of the United States with the approval of the Senate.

II. The Chairman of the Board is the President of the Federal Reserve Bank of New York.

III. Four of the 11 Federal Reserve Governors rotate, and he serves as the FOMC President. His three remaining presidents can attend his FOMC meetings, but cannot vote on key monetary policy issues.

FOMC – How does it work?

The FOMC holds eight meetings a year, which are closed to the public. CEO is appointed by the President of the United States

As the Federal Reserve is the central bank of the United States, the Federal Reserve's primary responsibility is to effectively advance its goals of maximizing employment, stabilizing prices, and easing long-term interest rates. Like other central banks in the world, the Fed does not have a clearly established inflation target. Its success has always influenced the pursuit of non-quantifiable inflation targets.

How does the FOMC decide interest rates?

The decision to raise, lower, or keep interest rates directly affects the US dollar. Raising Interest Rates When the Board decided to raise interest rates, they sold US Treasury bonds to major financial dealers, who paid by transferring the money to FOMC accounts. This will lead to a shortage of US dollars in the banking system and increase the value of the currency.

Lower Rates

When the FOMC cuts rates, they will literally buy US Treasuries from big financial dealers. The Forex FOMC then transfers the funds to the trader's account. This will increase the supply of US dollars in the banking system and devalue the currency.

Interest Rates Will Completely Change The World Of Forex

The Forex Trading World Is Completely Dependent On Interest Rates. A currency's interest rate is the most important factor in knowing the perceived value of a currency.

Transactions are made at the perceived value of the currency. Forex traders are always concerned about interest rate fluctuations. Fluctuations lead to price stability or inflation.

Investors are literally waiting for her FOMC statement

If the FOMC statement contained economic optimism, it would simply help the dollar rise. In a way, the FOMC completely rules the world of foreign exchange trading.

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Quantitative easing is another tool. This is where the Federal Reserve creates money out of thin air and buys assets such as exchange-traded funds (ETFs) and government bonds. The purpose of quantitative easing is to ensure sufficient liquidity in the market.

The FOMC's other tools are cash generation and direct lending to businesses.

The FOMC decision is usually one of the most important items on the economic calendar. However, its relevance as a trading product has declined in recent years due to what is known as forward guidance.

Historically, major assets such as currencies, stocks and bonds have moved rapidly in response to monetary policy. This is because previously, traders did not know what the Fed would do during the session.

To curb this volatility, the Fed has adjusted its so-called forward guidance. Here, the FOMC session outlines what future sessions will do. For example, during the coronavirus pandemic, banks will cut interest rates to zero, and projected interest rates will remain that low for years to come.

Still, some assets tend to react to FOMC decisions. First, if the FOMC statement is dovish in nature, the US dollar tends to fall. On the other hand, if the Fed's rhetoric is hawkish, the dollar is trending higher.

Second, when the Fed sounds dovish, stocks go up because companies like low interest rates. The same is true for corporate bonds.

There are a few things to prepare for the FOMC decision. First, we need to know when the meeting will take place. You can find this out by looking at the economic calendars that most trading websites offer for free.

Next, you need to check the Fed Rate Monitor Tool. It shows what analysts expect from current and upcoming interest rate decisions.

Finally, you should read reports about the conference on credible platforms such as Bloomberg, Financial Times and Wall Street Journal. In other words, you need to do your research properly.

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