Financial Event: Federal Reserve Meeting
What is the Federal Open Market Committee Meeting?
The Federal Open Market Committee (FOMC) meeting is a regular session held by a branch of the Federal Reserve that is responsible for the monetary policy of the United States. After addressing short-term monetary policy, the FOMC continues to decide on a federal funds target rate which they believe can be achieved. The minutes and official public announcements after an FOMC meeting are commonly referred to as ‘Fed announcements.’
When is the next Fed announcement?
The next FOMC meeting will take place on 16-17* March
, with any changes to the monetary policy announced immediately after.
2021 FOMC dates
Why is the Fed Announcement one of the most important dates to traders?
For one main reason: Because it affects interest rates.
By adjusting monetary policy using three specific policy tools the Committee can either lower or raise the rate of the Federal funds in the United States. This change will subsequently affect all interlinked interest rates such as FX, Stocks and Bonds prices, something that will in turn affect traders and their investing.
Which markets are affected by the FOMC?
The markets most affected by the FOMC are:
- Forex: The US dollar is the biggest part of the immense daily Foreign Exchange trading volume, making it the world’s most traded currency.
- Indices: It’s not good for shares when rates are higher and, on the contrary, it can be good for shares when rates are lower.
- US Bonds: The most directly affected of all from interest range changes
Traders and investors all over the world are trying to forecast what monetary policy change is going to happen next in each Fed meeting, and adjust their strategies and portfolios accordingly.
How does the FOMC affect the federal funds rate?
While it doesn’t have a direct say over the rates charged by banks to lend money to each other, the FOMC can indirectly change the fed funds rate using three policy tools that affect money supply. Namely, these policy tools are: Open Market Operations, the Discount Rate and Reserve Requirements.
Rates charged by different banks when lending money to each other cannot be directly changed by the Committee, however, it can indirectly change the Federal Funds rate.
Open Market Operations are handled by the FOMC, while the Federal Reserve Board is in charge of both the Discount Rate and Reserve Requirements.
Open Market Operations
Open Market Operations refer to the buying and selling of Government Bonds on the open market.
For decreasing monetary supply, the FOMC sells government bonds. This way money is taken out of the economy which consequently leads to higher interest rates.
For increasing monetary supply, it does the opposite. The Committee buys government bonds to allow more money circulating in the economy, which in turn leads to lower interest rates.
Banks can either borrow and lend each other money at the rate of Federal Funds or they have the option to borrow money directly from the Federal Reserve at a discount. This is known as the Discount Rate.
A higher Discount Rate can mean a higher Federal Funds Rate and the opposite for a lower Discount Rate.
The percentage of customer deposits needed to be held by a Bank to be able to cover withdrawals is known as Reserve Requirements
If Reserve Requirements are High then Banks will limit their lending and will charge higher interest rates while when the Reserve Requirements are Low, Banks lend more freely and at lower rates.