FOMC meeting and what it means

FOMC Meeting — Quick Guide

Doesn’t matter if youre new to the space or an old sweat theres no doubt at some point you will have heard the words ‘FOMC’ or ‘Fed meeting’. But what is it and why is it such a big deal in the financial world? Read on…

The Federal Open Market Committee (FOMC) is the monetary policy makers of the Federal Reserve. It comprises of 12 members and schedules eight meetings per annum or one roughly every six weeks. They can also hold unscheduled meetings should the need arise on economic and financial matters. It is important because by law, the Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of maximum employment and stable prices. Usually, the FOMC conducts policy by adjusting the level of short-term interest rates in response to changes in the economic outlook. Since 2008, the FOMC has also used large-scale purchases of Treasury securities and securities that were issued or guaranteed by federal agencies as a policy tool to lower longer-term interest rates and thereby improve financial conditions and so support the economic recovery. (https://www.federalreserve.gov/faqs/about_12844.htm)

The reason this can cause so much volatility in the markets is that changes in monetary policies can and do have a knock-on effect for financial markets across the board. As such the price of assets can be swayed.

Federal Open Market Committee (FOMC) members vote on where to set the rate. Traders watch interest rate changes closely as short-term interest rates are the primary factor in currency valuation.

When the Federal Reserve announces a hike, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop, and the market may tumble in anticipation.

On the other hand, when the Federal Reserve announces a cut, the assumption is consumers and businesses will increase spending and investment. This can cause stock prices to rise.

If expectations differ significantly from the Federal Reserve’s actions, these generalized, conventional reactions may not apply. For example, suppose that the Federal Reserve is expected to cut interest rates by 50 basis points at its next meeting, but they instead announce a drop of only 25 basis points. The news may cause markets to decline because the assumption of a cut of 50 basis points had already been priced into the market.

A higher-than-expected rate is positive/bullish for the USD, while a lower-than-expected rate is negative/bearish for the USD. Although the relationship between interest rates and the stock market is indirect, the two tend to move in opposite directions. As a rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down. But there is no guarantee as to how the market will react to any given interest rate change. (https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/)

For now, this will continue to affect the cryptocurrency markets too, given the correlation between trad-fi markets and the cryptocurrency asset space.

What is said during the interest rate statement says is also important as expectations play a major role in financial markets. The first part of the FOMC press conference is a prepared statement, which usually begins at 18:00/19:00 UTC. The second half is the press conference, where the Fed chair takes questions — and the responses often cause volatility in financial markets.