Trading Essentials
What is FOMC? How the FOMC affects Forex market
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Marketing
7 min read
12/06/2023
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What is FOMC

Besides news that affects the volatility of the Forex market such as Non Farm news, CPI, GDP, etc., there is one more that is equally important. It’s the monetary policy announcement of FOMC.

The Federal Open Market Committee (FOMC) is responsible for directing monetary policy through open market operations. Therefore it is one of the important news for traders in Forex. So what exactly is FOMC and how does it affect Forex? Let’s find out now!

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What is FOMC?

The Federal Open Market Committee (FOMC) is the organization that decides the monetary policy of the United States Federal Reserve System. The Federal Reserve, or the Central Bank of the United States, is the central bank of the United States which is responsible for operating monetary policy and supporting the nation's financial stability. 

The FOMC consists of 12 members, including 7 members from the Federal Reserve Board of Governors (including the Chairman of the Reserve Bank) and 5 other members from the Federal Reserve Banks. They meet about eight times a year to review the economic situation, analyze data, and make monetary policy decisions.

The main decisions of the FOMC are the setting of the federal funds rate and the decision on the buy/sell of government securities and bonds in open market operations. These decisions can significantly affect the United States's economic activity and financial markets.

What is the difference between the FOMC and the Fed?

There are many people who learn what the FOMC is and often wonder what the difference is between the FOMC and the Fed. FOMC and Fed are two terms related to the US Federal Reserve and both institutions are responsible for conducting monetary policy. So what is the difference between them? Here are some of the differences between the FOMC and the Fed:

  • Fed (Federal Reserve System): The Fed is the regulator of the entire US central banking system. It was established under the Federal Reserve Act of 1913. It is responsible for administering monetary policy, maintaining price stability and financial stability of the nation. The Fed comprises the Board of Governors, the Federal Reserve Banks and the FOMC.

  • FOMC (Federal Open Market Committee): The FOMC is a committee within the Fed system. So what is the main mission of the FOMC? It is about making decisions about U.S. monetary policy, including setting the federal funds rate target and deciding on the trading of securities and government bonds in the open market.

Once we have understood well what the FOMC is, we can distinguish it from the Fed. In a nutshell, the Fed is the institution that manages the entire U.S. central banking system, while the FOMC is a committee within the Fed. It is responsible for making specific monetary policy decisions. 

The FOMC's Structure

 

Once we understand what FOMC is, let's move on to the next part, the FOMC's structure. It includes the following members:

Permanent Members: 7 non-permanent members, including:

  • Chairman of the Federal Reserve: The current Chairman of the Fed, who heads the FOMC and is responsible for leading the Fed in determining monetary policy and the operation of the FOMC.

  • Federal Reserve Vice Chairman: The Fed Vice Chairman is the other non-permanent member of the FOMC and assists the Chairman in managing and deciding monetary policy.

  • The other 5 members of the Federal Reserve Board of Governors: The FOMC includes members of the Fed's Board of Governors, elected and approved by the President of the United States. The Board of Governors is the final decision-making institution in the Fed and is responsible for implementing the Fed's monetary policy.

Alternate Members: In addition to the non-permanent members, the FOMC also includes four alternate members from the Federal Reserve Banks. These members are selected from 12 Federal Reserve Banks, each with a defined rotation period.

Purpose of the FOMC meeting

When learning what FOMC is, do you wonder what the content of the FOMC meeting is and how it takes place? Because knowing what the FOMC is is not enough, you need to know more about the content of the meeting to get more information for analysis.

The meeting of the FOMC take place with the purpose of assessing the economic situation and making decisions on monetary policy for the United States. Specifically, the content is as follows:

  1. Economic Situation: FOMC members discuss and analyze economic indicators and data such as GDP growth, unemployment, inflation, industrial production and consumption. This assessment helps the FOMC understand the current situation of the economy and forecast future development trends.

  2. Review the financials: The FOMC follows financial factors like an exchange, stock markets, interest rates, and credit. FOMC members assess the impact of these factors on financial stability and the potential for risks in the financial system.

  3. Monetary Policy Decisions: Based on economic & financial information and analysis, the FOMC makes monetary policy decisions. The FOMC's main decisions relate to the interbank interest rate target and decisions about the trading of securities and government bonds in the open market. The purpose is to maintain price stability, create a favorable business environment, and support the sustainable economic development of the United States.

  4. Disclosure: After the meeting, the FOMC released information about the monetary policy decision and the meeting's developments. This information includes policy statements, economic forecasts and meeting minutes. This information is disclosed to create transparency for investors, banks and the public.

How the FOMC affects the Forex market

The FOMC has a significant impact on the forex market through its decisions and statements regarding monetary policy. Here are some ways in which the FOMC affects the forex market:

  • Interest rate decisions: One of the key tools of monetary policy is the setting of the federal funds rate, which is the interest rate at which banks lend to each other. Changes in interest rates can influence the value of a currency. When the FOMC raises interest rates, it generally attracts foreign investors seeking higher returns, leading to an increase in demand for the currency and potentially appreciating its value. 

  • Economic outlook assessment: The FOMC assesses the economic conditions and outlook for the United States. Any signals or changes in their assessment can impact the forex market. Positive economic assessments and expectations of future growth can strengthen the currency, while negative assessments can weaken it. 

  • Market sentiment and risk appetite: The FOMC's decisions and statements can have a significant impact on market sentiment and risk appetite. Forex traders closely monitor FOMC meetings and statements to gauge the central bank's sentiment toward the economy and its willingness to act on monetary policy. This can lead to increased volatility and fluctuations in currency prices.

It's important to note that the impact of the FOMC on the forex market can vary depending on market expectations, economic conditions, and other global factors. Traders closely follow FOMC announcements and statements to stay informed about potential shifts in monetary policy and adjust their trading strategies accordingly.

Where to read FOMC news

Surely those who are learning what FOMC is, will also wonder where is FOMC news. Minutes of the FOMC meeting are usually released about 3 weeks after the meeting.

Specifically, the meeting's information and developments are recorded in the meeting minutes. And then it is reviewed and prepared for publication to the public. Here are some sources you can look to view the FOMC newsletter:

  1. Federal Reserve Website: The official website of the Fed that provides information about the FOMC and related bulletins.

  2. Forex Factory website: quick updates on important economic indicator announcements. In addition to FOMC news, you can also track CPI, Non Farm, CPI, etc

  3. Top financial websites: Financial websites like Bloomberg, Reuters, CNBC and Financial Times are also sites you can visit to see the numbers.

After learning about what FOMC is, if you want to trade on news, you can read more related to the Forex market at: https://vnforex.com/ 

Conclude

Now you can answer the question what is FOMC? News about economic indicators are one of the factors that make the Forex market volatile. Learning about the FOMC and its significance to the forex market will provide you new tools to make your trade more steady.

Follow FXCE's latest news and updates at the following channels:

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