Use FOMC Monetary Policy to Forecast Market Trends

FOMC Monetary Policy Plays an Important Role in Exchange Rate

Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board and it is the principal monetary policy decision-making body. The committee determines federal funds target rate. It also considers the state of the economy and the future directions for monetary policy. Because the changes in federal funds rate can affect the short-term interest rates, foreign exchange rates, and long-term interest rates, many investors pay attention to this economic indicator.

The policy interest rate is one of the most important economic indicators that draw the attention of investors from all over the world. In particular, it is very necessary to look at the U.S. federal funds rate because the U.S. dollar is the world’s largest reserve currency and the interest rate has a great impact on the market.

Why does the policy interest rate, especially the U.S. federal funds rate, draw the attention of investors? This is because that the changes in interest rate affect the flow of money. When the statistics, such as employment statistics, show good results, it is anticipated that the interest rate would be raised. As a result of this, the value of the currency rises and changes in interest rate will be carried out. Consequently, investors pay special attention to the financial policies which has direct impact on the interest rates.

Release Date of the FOMC Monetary Policy and Time for Trade

The FOMC holds meetings 8 times a year at intervals of 6 weeks. Some of the meetings last one day (on Tuesdays) while others last two days (on Tuesdays and Wednesdays). The minutes of the meetings that include interest rates and reasons for policy actions will be released three weeks after the scheduled meetings. As the meetings are held in the United States, the minutes will be released at local time.

It can be disadvantageous to investors who live in a different time zone. Some investors thus wait for the minutes to be released since it is such an important economic indicator. This is just like the time when the employment statistics are released.

Investing is expected to be active immediately after the release of FOMC monetary policy. Different from employment statistics, the monetary policy of the central bank can sometimes be predicted in advance. However, when the monetary policy is contrary to the expectations, large movements in markets may occur. It is thus said that this is the best time for trading binary options.

Especially, it can be a good time for short-term trading. The market tends to move in the direction in accordance with the policy interest rate. Following the market trends is considered as a trading strategy by most investors.

What will Happen When the U.S. Federal Funds Rates are Raised?

Since December 2008, the target range for federal funds rate has been lowered to 0%~0.25%. It is conducted in an effort to ease the stance of monetary policy. Different from the traditional policy instrument that changes interest rate, non-traditional measures have been undertaken, such as enact open market operations and keep the size of assets on the FRB’s balance sheet at a high level.

As of March 2015, the target range for federal funds rate has been maintained at 0%~0.25%. Except that the prices of goods have not been increased, it has been seen improvements in the labor market and unemployment rate in recent years. By looking at the economic conditions, it is anticipated that the interest rate will be raised in 2015.

Here, it is necessary to remember: “What will happen to the U.S. dollar if the U.S. federal funds rate rises?”

Basically, when the interest rate is raised, many investors will invest as those who lend money to the government and companies can get more interest payment back. For example, if the U.S. federal funds rate is raised, more investors will buy the U.S. dollar as they think that it will be beneficial to hold U.S. dollar rather than currencies with low interest rate. When the demand for the U.S. dollar increases, the value of the U.S. dollar will rise.

Why Raise or Lower the Interest Rate?

Why the interest rate is changed periodically? Why do the central banks raise or lower the interest rate? It is carried out in an effort to fight against inflation and deflation.

Inflation … a situation where the price level of goods continues to increase and the value of currency decreases

Deflation … a situation where the price level of goods continues to decrease and the value of currency increases

Inflation is a situation where a high demand in goods occurs and the prices of goods rise. In order to fight against inflation, it is necessary to raise the value of currency, which can be effectively achieved by reducing the amount of money.

So, how to reduce the amount of currency? The most effective method is to raise the interest that is needed to borrow the money. If the interest rate is raised, more money will be needed to pay for the interest. Thus, the number of people that borrow the money will decrease and the amount of currency will reduce.

Conversely, deflation is a situation where the prices of goods fall and less amount of money are in circulation. In order to fight against deflation, lowering interest rate is usually carried out.

Currencies Influenced by the Changes in the US Interest Rate

As it is mentioned above, the U.S. dollar, the world’s largest reserve currency, has an impact on other currencies. There are a lot of investors who sell a currency and buy the U.S. dollar.

Even though you are not trading currencies that are directly related with the U.S. dollar, it is still necessary to pay attention to the FOMC. It is necessary to be cautious when the unexpected policy is announced and the minutes are released.

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