Federal open market committee (FOMC) is an important part of Federal Reserve Board that decides about the direction of monetary policy. The committee meets at various times in a year to decide about maintenance and making alterations in the present monetary policy. When a decision to introduce a change in the current policies takes place, it results in purchasing or selling of government securities in U.S.A. in open market to bring development of economy.
I. Its board of governors consists of seven members seven members, who gets appointment from the President of America with the approval of senate.
II. The Chairman of the board is the President of Federal Reserve Bank of New York.
III. Out of 11, four Federal Reserve Bank’s presidents serve as Presidents in FOMC on rotational basis. The rest three presidents might attend the FOMC meetings but they do not have the permission to vote on the important monetary policy issues.
FOMC-how does it function?
FOMC hosts eight meetings in a year and the meetings take place secretly. The Chairman of the board gets nominated by the President of America. As the Federal Reserve System is the Central bank of the United States, the main responsibility of the body is to bring effective promotion of targets to achieve maximum employment, stability in price, and moderate long term interest rate. Like the other Central Banks in the world, the Fed does not have a clear proven inflation targets. Its success has always inspired to implement non-quantifiable inflation targets.
How does FOMC decide interest rates?
The decision to increase or, decrease, or keep the rates of interest unchanged has a direct impact on the US dollar. Increase in the rates of interest When the board takes a decision to increase interest rates, it sells the US government securities to important financial dealers, who would again pay the money by transferring to FOMC’s account. This creates shortage of US dollars in the banking system and adds to the currency’s value.
Decrease in the rates of interest
When FOMC is cutting down the rates of interest, it literally buys the US government securities from major financial dealers. Forex FOMC would then transfer the money the accounts of the dealers. This would increase the supply of US dollars in the banking system and therefore bring down the value of the currency.
Interest rates change the Forex world completely
The Forex trading world is completely dependent upon rates of interest. The rate of interest of the currency is the most important factor in knowing the perceived value of the currency.
Trading takes place with the perceived value of the currency.Forex traders are always apprehensive about fluctuations in the rates of interest.Fluctuations result in price stability or inflation.
Investors literally wait with FOMC’s statement as it has an important impact on the expectations about rate hikes. When FOMC statement has an optimistic assessment of the economy, this would simply add to the rise in value of the dollar. In a sense, FOMC completely rules the world of Forex trading.