Trading The FOMC Statements
Events, news, and announcements can all affect financial asset prices. Often, these are unforeseen, but there are others that are timed well in advance. As a trader, you can prepare for these calendar events and be ready to trade around them.
Some of the most widely anticipated in the markets are announcements from central banks on interest rates. Here, we look at the most important: the FOMC statement.
What Is The FOMC?
The FOMC (Federal Open Market Committee) is an arm of the US Federal Reserve System. This was established in 1913 with the sole intention of managing, governing and regulating the state of the US economy.
As part of its mission, the Fed decides and dictates national monetary policy. For more information about central banks and their importance in the markets, see our blog article “What are Central Banks?”.
The FOMC is a key part of the Fed and it sets the targets for the federal funds rate, the base interest rate, and authorizes actions to achieve this target.
“Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.” Source: US Federal Reserve
Interest rate changes affect all markets. To give the classic example of how changes in interest rates affect the stock market, look at the case when the FOMC reduces interest rates during periods of recession in order to boost demand and encourage people to spend more. Due to this decrease in interest rates, traditional savings instruments look less attractive, and investors tend to move more toward equities, pushing the market higher. This is only a generalization however and there is no guarantee that this will happen.
Preparing for FOMC Statements
The FOMC meets eight times a year and issues a statement on its projections, its actions, and the target range for the federal funds rate. This is followed by a press conference thirty minutes later.
Given the potential significance of these statements for all markets, it is important to be prepared well in advance if you are thinking of trading FOMC statements.
Check the Economic Calendar
You can find the next date of the FOMC and their relevant announcements on the Federal Reserve site and on most economic calendars.
These calendars often show previous and expected interest rates. The Fed calendar also contains all past statements and previous press conferences.
Read About Expectations
Knowing the general market consensus of what the event will bring is also good because what the statement actually says can significantly impact the price. If the new rate range is widely unexpected, this will generally lead to price volatility.
However, if the rate is as expected, you might see price ranges on the markets being held and price movements fading. The information is already priced in.
After FOMC Statements
There is a period of initial reaction until the press conference. Sometimes, the movements seen in this time will be reversed when the press conference is underway.
Traders should remain very aware during this post-statement period, and closely watch market reaction and volatility.
Often, just before (up to a few minutes) and just after an important release such as the FOMC statement , you may notice market makers and other larger market participants pulling liquidity as they wait for—and then decipher—what this new information could mean for the market.
This means an increased possibility of volatility and could lead to slippage if you enter or exit with market orders too soon after the news is released or if resting stop orders were too close to the market.
Despite the fact that the relevant facts are in the statement, the widely-watched press conference thirty minutes later can have a significant impact. In particular, the answers to the first two or three questions can cause significant changes in the way the market reacts.
Opportunities Are There, But Be Prepared for Anything
Financial market prices are not solely dependent upon the performance of an organization or an industry. They are affected by many other factors, and interest rate announcements are one of them.
Economic events like the FOMC can be a source of volatility for traders. However, this volatility doesn’t come without its risks. Hence, if you are going to trade an event like the FOMC, it is essential to get into it with sufficient knowledge of expectations, have a solid plan for the event and, depending on your overall trading strategy, abide by your rules.
One of the best ways to start trading events, or indeed only sort of news, is to run the simulation mode in Bookmap.