How to trade FOMC meetings

What is the FOMC?

The Federal Open Markets Committee (FOMC) is a conference of 12 Federal Reserve officials to discuss recent economic data and create policy to steer the open market. The committee only enacts policy it believes necessary to achieve the Federal Reserve’s two goals: maximum employment and a target inflation rate of 2%.

At every FOMC meeting the committee discusses data provided by the 12 regional Fed Bank presidents and votes on whether to change economic policy. When announcing no policy change, the committee will specify one of several reasons. They may simply decide that no change is necessary, they may state there is not enough information to make a policy decision, or they may prefer to wait and see how the market changes before enacting policy.

Learn more about the Federal Reserve and FOMC meetings.

Is the FOMC the same as the Fed?

No, the FOMC is not the same body as the Fed. Although it is understandable to confuse the two, as the FOMC is one of three key entities of the Federal Reserve. The FOMC is best thought of as the policy-making body of the Fed. It has a rotating board of officials from the two other branches of the Fed: the Board of Governors and presidents from the twelve Reserve Banks.

Specifically, the FOMC consists of seven members from the Board of Governors, the Federal Reserve chairperson and a rotating cast of four presidents from the remaining eleven Reserve Banks.

When does the FOMC meet?

The FOMC meets eight times a year, nearly every six weeks. Although the committee can arrange more or fewer meetings as needed. Each meeting last two days. For 2023, the meeting schedule is as follows:

• Jan/Feb 31-1
• March 21-22
• May 2-3
• June 13-14
• July 25-26
• September 19-20
• Oct/Nov 31-1
• December 12-13

Key tools in the FOMC toolbox

Actions taken by the FOMC to control the economy are called ‘tools.’ Because the committee handles open market operations, the tools they use to influence the economy involve manipulating the open market. Open market operations refer to controls of the money supply through interest rates and quantitative easing.

Interest rates

The base interest rate set by the Fed establishes the rate at which banks charge one another interest for overnight loans. In turn, this rate impacts interest rates banks charge other businesses and consumers. A lower interest rate stimulates borrowing and spending to strengthen the economy; a higher interest rate puts a dampener on borrowing and spending to slow down a hot economy.

Quantitative easing

Quantitative easing is the rate at which the Fed injects money into the economy. The FOMC adjusts this money supply to buy more assets like government bonds and ETFs. The Fed buys these assets as a way of creating more liquidity in the open market, usually when interest rates are near zero and economic growth is stalled.

Sometimes the money ‘printed’ via quantitative easing is given directly to businesses, but usually, the purchase of securities will give banks enough cash to support lending to businesses and consumers.

Quantitative tightening

Quantitative tightening refers to when the FOMC slows the rate at which they add money into the economy. As a policy, it can be thought of as the reverse of quantitative easing.

What do FOMC announcements mean for forex trading?

The forex market used to be heavily impacted by announcements following every FOMC meeting, but that has changed as the FOMC now gives more indication to future policy changes. This is called forward guidance and is released as meeting notes detailing what actions will likely occur in future meetings.

However, FOMC meetings are still influential for USD rates and the broader forex market. This is because changes in interest rates can directly affect the value of USD, and forward guidance gives traders indications of that future movement.

You will often see FOMC meetings described as either hawkish or dovish depending on whether the committee raises or cuts interest rates.

• An interest rate hike is considered hawkish behaviour by the Fed. This is because higher interest rates are typically bad for consumers but can signal a growing economy. Higher interest rates may be set by the FOMC in response to rising levels of inflation to avoid a potential recession. High interest rates can also dissuade consumer spending and lower employment. However, forex traders get a better return in high-rate economies, so some may want to increase their holdings of USD
• An interest rate cut is referred to as dovish behaviour. Rate cuts are thought to strengthen an economy by encouraging consumer spending and raising employment levels. In low-interest rate economies, traders will often borrow that currency to fund trades in a higher currency, known as carry trading. High interest rates set by the FOMC also impact the yield of government bonds, influencing more consumers to invest in the more stable, long-term assets

Short-term forex trading strategies for FOMC meetings

Short-term traders like day traders can still take advantage of policy announcements following FOMC meetings. While practices like forward guidance do dampen the immediate market effects of FOMC meeting announcements, interest rate changes can still create movement in US dollar markets.

USD markets may exhibit a knee-jerk reaction to FOMC announcements. Often this results in an initial movement in a direction depending on if the FOMC announcement of interest rates is as expected or diverges from analysts’ expectations. A retracement often occurs as the market resist the movement, then a trend may or may not continue depending on the market’s conditions.

This recap of the February 1, 2023 FOMC meeting by our market analyst shows EUR/USD broke out above the previous level of resistance despite interest rates being raised at the slight level expected by traders.

Learn more about trading short-term volatility.

Long-term forex trading strategies for FOMC meetings

These days FOMC meetings provide more trading opportunities for long-term traders. The interest rate changes announced following FOMC meetings with additional forward guidance gives clues as to how a trader should adapt their strategy for future market conditions.

Long-term traders can benefit from taking a broader view of the market, particularly with a one-hour or one-day chart and opening trades in expectation of longer-lasting price trends.

Traders looking to take advantage of interest rates, known as carry trading, may shift their positions according to which currencies have a higher or lower interest rate than the US dollar.

Learn more about interest rate trading.

What do FOMC announcements mean for shares trading?

FOMC announcements are watched closely by everyone, not just forex traders. Other traders, investors and business owners will anticipate new economic info from the meetings because of how rate changes affect borrowing and bond yields.

When the interest rate is lowered, businesses can borrow at a lower rate and are more likely to take out loans as a growth investment. Stocks also see more interest because the yield from bonds and savings accounts lower with the interest rate cut.

The inverse is expected to happen when the FOMC announces interest rate hikes. The value of stocks may fall in response as people pull their money from the market to invest in bonds with higher yields. Of course, there are many other fundamental influences on stocks and indices that can influence the price. Being aware of all market influences is critical when trading economic news.

How to prepare for FOMC meeting announcements

It’s good practice to prepare for FOMC meetings ahead of time so you can quickly adapt your trading strategy regardless of what the FOMC announces:

1. Check the economic calendar to know when the next meeting will occur
2. Read timely analysis from our market research team including full previews of upcoming FOMC announcements
3. Write out your trading plan so you can act immediately when the FOMC press conference occurs
4. Set appropriate risk management strategies with stop-loss and take-profit orders

Ahead of the next FOMC meeting, open a City Index account or log in if you’re already a member. You can also open a demo account to familiarise yourself with our platform before trading live markets.