The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
What are they?
Fed Interest Rate Decision
The federal funds rate is the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight.
The rate decision is usually priced into the market, so it tends to be overshadowed by the FOMC Statement, which is focused on the future.
Short-term interest rates are a very important factor in currency valuation, traders look at most other indicators merely to predict how rates will change in the future. FOMC members vote on where to set the target rate. The individual votes are published in the FOMC statement.
FOMC Economic Projections
This report includes the FOMC's projection for inflation and economic growth over the next 2 years and, more importantly, a breakdown of individual FOMC member's interest rate forecasts. It's the primary tool the Fed uses to communicate their economic and monetary projections to investors;
FOMC Statement
It's the primary tool the FOMC uses to communicate with investors about monetary policy. It contains the outcome of their vote on interest rates and other policy measures, along with commentary about the economic conditions that influenced their votes. Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes
FOMC Press Conference
The press conference is about an hour long and has 2 parts - first, a prepared statement is read, then the conference is open to press questions. The questions often lead to unscripted answers that create heavy market volatility. The press conference is web-casted on the Fed's Ustream channel in real-time.
It's among the primary methods the Fed uses to communicate with investors regarding monetary policy. It covers in detail the factors that affected the most recent interest rate and other policy decisions, along with commentary about economic conditions such as the future growth outlook and inflation. Most importantly, it provides clues regarding future monetary policy.
What are the expectations for the Fed's Interest rate decision?
The Interest rate is expected to stay at 0.25% despite rising inflation concerns. The Federal Reserve dialed up its economic growth expectations but signaled that there are no expected interest rate hikes for the next two years.
Four of the 18 Federal Open Market Committee members were looking for a rate hike at some point in 2022, compared with just one at the December meeting.
For 2023, seven members see a rate increase, compared with five in the December forecast.
If rates remain unchanged, attention turns to the tone of the FOMC statement, and whether the tone is hawkish, or dovish over future developments of inflation.
The statement may influence the volatility of USD and determine a short-term positive or negative trend. A hawkish view is considered as positive, or bullish for the USD, whereas a dovish view is considered as negative, or bearish.
Professional Insight
Barclays Bank PLC now expects annual inflation, measured by the Fed’s preferred gauge, to hit 3.6% in the fourth quarter; nearly double the central bank’s target.
“Should inflation move materially and persistently above 2 percent, we have the tools and experience to gently guide inflation back down to target. And no one should doubt our commitment to do so,” Fed governor Lael Brainard said in a speech on June 1.
Policymakers have said since December that they wouldn’t raise rates until inflation hit 2% and is forecast to exceed that level for some time and the economy has achieved maximum employment.
What happens if...
An interest rate hike tends to boost the local currency, as it is understood as a sign of healthy inflation, if the statement is a more hawkish outcome than what was expected the market will react positively. The policy will be considered expansionary, meaning they want to stimulate markets. The US Dollar will increase in value versus other currencies.
What happens if...
An interest rate cut, on the other hand, is seen as a sign of economic and inflationary distress and tends to weaken the local currency, if we find that the statement is more dovish than what was expected; the policy is intended to decrease the monetary expansion to fight inflation. The US Dollar will reduce in value versus other currencies.
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