WHAT IS FOMC AND IMPACT ON MARKET MOVEMENT
Fundamental analysis is very useful for traders in making trading decisions. This fundamental analysis can be in the form of economic news, policies, politics, events, and others that can affect the value of a currency. One of the fundamentals that can affect currency values and market movements is the FOMC. What exactly is FOMC? Let's get to know FOMC by reading the article below!
Definition of FOMC
FOMC stands for Federal Open Market Committee. The FOMC consists of high-ranking officials from the United States central bank, namely the Federal Reserve (The Fed). The FOMC meets regularly to discuss economic and financial conditions in the US.
The FOMC meeting will formulate changes or improvements to US monetary policy, including discussing interest rates, money supply, monetary stimulus, deciding to buy or sell stocks and government bonds, and others.
In short, these meetings affect the movement of the world economy because currently the Fed is the head of US monetary policy. And, of course, the value of the US dollar is very decisive globally.
The Important Role of the FOMC in Market Movements
The top Fed officials who are entitled to vote at the FOMC meeting each year consist of permanent and rotating members. Permanent members will always be present and have a vote as long as their position does not change. The chairman of the Fed and the members of the Board of Governors of the Federal Reserve, headquartered in New York, generally number four as "permanent members of the FOMC."
Traditionally, the chair of the FOMC is the Chairman of the Board of Governors. The current chairman of the Fed is Jerome Powell, who was sworn in on February 5, 2018. Other members include Richard Clarida, Randall Quarles, Lael Brainard, and Michelle Bowman. Meanwhile, rotating members will change every year. There are 12 branch companies spread across major cities.
They include Fed Chairs of the New York, Philadelphia, Minneapolis, Dallas, Chicago, St. Louis, Kansas City, Boston, Cleveland, Richmond, San Francisco, and Atlanta. Regarding what the FOMC is and how meetings are held, generally meetings are held eight times a year. The schedule is released at the beginning of the year.
The discussion includes the current situation, decisions related to determining interest rates, the amount of money in circulation (money supply), or decisions to buy and sell shares or bonds. Although the decisions of the FOMC meeting seem to only apply in the US region, investors tend to use them as a basis for making investment decisions. Therefore, the impact of the FOMC meeting's decision will affect the strength of the US dollar exchange rate, fluctuations in stocks on the US stock exchange, or bond yields.
Meanwhile, we know that the US dollar plays a major role in determining the value of world currencies. In short, what is produced through what is FOMC is a domino effect that can spread throughout the world.
Traders who know the new policy from the FOMC can certainly immediately determine buying or selling in the forex market. Because the effect is so large, the results of FOMC decisions often directly affect prices in financial markets.
FOMC Decision Terms
There are two terms related to the FOMC decision that you need to know to understand the impact of the FOMC decision, namely hawkish and dovish
Hawkish is the FOMC's decision in favor of tightening the monetary sector, increasing interest rates (FED Rate/FFR), or reducing monetary stimulus. Meanwhile, dovish is the FOMC decision that is more inclined to monetary easing, lowering the Fed Rate, or adding monetary stimulus.
A hawkish tone will usually encourage the strengthening of the US dollar. On the other hand, a dovish decision will usually encourage the weakening of the US dollar.
If the FOMC takes a hawkish tone, the USD will strengthen and market sentiment towards the USD will tend to be bullish. If the USD strengthens, it will cause other currencies that are opposite the USD in one pair to weaken or decrease.
On the other hand, if the FOMC takes a dovish tone, the USD will tend to weaken or decline. The decline in the USD could be sharper when these FOMC decisions are unpredictable by the market.
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