The Federal Open Market Committee (FOMC) meeting is a key date on every trader’s economic calendar. Taking place eight times a year, the meeting is an important event for all traders to prepare for.
As one of the key gauges of the future of the US economy, the meeting usually generates a considerable amount of market movement both before and after it takes place.
So – how can you make the most out of this economic event as a part of your trading strategy? The first step is to be fully informed about what exactly is at stake in the FOMC meeting, and what kind of opportunities arise from the talks.
We’ve collated all the information you need to help you to plan ahead.
What happens in the meeting?
Every FOMC meeting sees seven governors of the board and five Federal Reserve Bank presidents discuss and decide on monetary policy for the US. The meeting ultimately has two main purposes: to review existing economic data and, in light of this, to decide what kind of intervention is necessary.
The committee’s decision considers huge quantities of data including household spending, business fixed investment, inflation and employment growth. While the meeting is entirely private, the key decisions are announced at a press conference shortly after the meeting has finished.
Three weeks after the FOMC has passed, the minutes are published in full. The FOMC ultimately seeks to stabilise the economy by raising or lowering interest rates.
Using a wealth of economic data allows the committee members to evaluate whether they want to drive or slow inflation in relation to money supply and the target inflation rate of 2 percent.
Why is the meeting important for traders?
The FOMC, alongside the NonFarm Payrolls report, is a key indicator of the US economy’s health. Traders might use the committee’s decision to provide a broad context for their trading strategies. The FOMC’s decision has a direct impact on these specific trading instruments in particular:
- Dollar: If the FOMC decides to increase interest rates, demand may increase and the value of the dollar is likely to rise.
- Gold: If the dollar is strengthened by higher interest rates, this may cause gold’s value to decline. Traders could flock to gold if the FOMC’s outcome suggests a negative outlook for the US economy, because it is seen as a stable asset that holds its value throughout periods of turbulence.
- Indices: Share prices may be pushed down in the case of rising interest rates, meaning that US indices are subject to movements from speculation.
- Bonds: Rising interest rates may cause bonds to fall overall.
Since the US economy is the largest economy in the world, the repercussions from the FOMC’s decision can be felt worldwide.
Traders across the globe pay attention to the decision as an indicator of global economic trends, and an insight into how other central banks around the world might adjust their inflation policy.
How might traders adjust their strategy?
The volatility which surrounds the FOMC’s decision can be a source of potential trading opportunities. Day traders in particular might adapt their strategy to maximise on the shifts which occur both before and after the meeting.
Speculation weeks before the announcement is common, meaning that the markets may be prepared for either outcome. Those who prefer to follow long-term trading patterns should bear in mind that the FOMC’s decision may take a considerable amount of time to fully impact the economy.
By formulating a trading strategy which accounts for each meeting, traders might be able to maximise on the movements, whatever the outcome.
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