FOMC Meeting Minutes Explained – How to Trade

FOMC meeting minutes is a report released by the US Federal Reserve, a few weeks after the actual FOMC meeting concludes. The meeting minutes give a quick summary of discussions and individual opinions among the FOMC voting members.

FOMC Minutes meeting is an often sought after economic release made by FOMC. An acronym for the Federal Open Market Committee which is a part of the Federal Reserve System, the Central bank for the US. The FOMC meets eight times in a year, whose primary goal is to ensure price stability, create ideal economic scenarios to push for maximum employment while keeping an eye on the Long Term Interest Rates. The purpose of the FOMC meeting also considers the future course of action on the overnight interest rates which largely impacts the average consumer directly and also influences other aspects such as the housing markets, short term loans and so on. By constantly monitoring the economic activity of the country, such as GDP, Unemployment, Inflation, Consumer spending reports, the FOMC meets every month to not only monitor but also to set the course of future economic policies.

Structure of the FOMC

The FOMC is made up of twelve members that are comprised of seven board of governors appointed by the President and must be ratified by the US Senate, the President of the Federal Reserve bank and the vice chair is then selected (for a 4-year term) from the board of Governors by the President which must again be ratified by the US Senate. Once chosen, the policy makers cannot be expelled from their position regardless of their policy opinions.

The 2016 Members of the FOMC are as listed below

FOMC Board Members/Voting members

  • Janet L. Yellen, Board of Governors, Chair
  • William C. Dudley, New York, Vice Chairman
  • Lael Brainard, Board of Governors
  • James Bullard, St. Louis
  • Stanley Fischer, Board of Governors
  • Esther L. George, Kansas City
  • Loretta J. Mester, Cleveland
  • Jerome H. Powell, Board of Governors
  • Eric Rosengren, Boston
  • Daniel K. Tarullo, Board of Governors

What influences the FOMC Interest Rate Decisions

A primary factor for the FOMC interest rate decisions is largely attributed to keeping the federal funds rate on target which is usually determined by the markets. By changing or keeping the interest rates unchanged, the FOMC tends to manipulate the open market operations. The federal funds rate is nothing but the overnight interest rates used for lending/borrowing money between financial institutions overnight, in other words, raise or reduce liquidity in the markets. The Fed’s actions therefore directly impact the US Dollar and as a result the effect can rollover to other currencies as well (this is due to the fact that the US Dollar is considered to be the world’s reserve currency). Inflation, jobs and the general economic growth plays a large role in influencing the FOMC meeting decisions.

The Federal Reserve closely monitors the US economy and every quarter updates it quarterly economic projections, known as the Staff Economic Projections or SEP forecasts. The forecasts present a near and medium term outlook on what the Fed expects inflation, jobless rate and GDP growth will be like in the year and the year after. The SEP forecasts are often updated regularly. Besides the SEP forecasts, the Federal Reserve also releases a Dot Plot which shows every every FOMC voting member expects interest rates to be. The Dot plot is an important factor that the markets look to for pricing in future rate hike probabilities.

FOMC Meeting Minutes

The FOMC meeting minutes is usually released a few weeks after the actual FOMC meeting. The minutes show more detailed information on the arguments within the governing council or committee members. The FOMC meeting minutes are important because at times they can show a completely different picture. For example it is not common to find that while the FOMC statement might sound dovish, the meeting minutes could actually be hawkish or vice versa. The FOMC meeting minutes are viewed by market participants as an important release that gives more insight into the decision making committee of the Federal Reserve.

FOMC Minutes Meeting influence on the USD

FOMC Minutes MeetingWhen the FOMC decides to increase, decrease or keep the interest rates unchanged, it directly impacts the US dollar. Trading the FOMC minutes meeting is often used by news traders, whose strategy relies upon the quick fluctuations on the USD. On a primary level, investors look for hawkish (bullish) or dovish (bearish) tone of the FOMC statement.

Now a days, High Frequency Trading or HFT’s are used widely. These algos quickly scan the FOMC meeting minutes and assess for certain words that are considered dovish. Based on the way the report is interpreted, the HFT’s swing into action buying and selling. Therefore, the FOMC meeting minutes is generally volatile for the currencies and markets at large.

Despite the short term volatility, the FOMC meeting minutes doesn’t quite change the market trends. At most, the FOMC minutes might have a 24 – 48 hour influence on the markets. This is because, the FOMC meeting minutes is considered a lagging report. Therefore its impact on future prices are limited.

The markets react to the FOMC minutes meeting based on different outcomes.

Access the FOMC Meeting Minutes here.

Trading the FOMC Meeting Minutes

The FOMC meeting brings with it high volatility in not just USD currency pairs but other currencies as well. The assets that are most influenced by the FOMC meeting minutes are the US Dollar Index, EURUSD, USDJPY, Gold, AUDUSD, S&P500 or e-mini futures

Scalping the markets during the release of the FOMC meeting minutes is not advisable. Besides the widening spreads, the markets tend to remain volatile for a few hours. It is also hard to predict the FOMC meeting minutes outlook based on the previously concluded FOMC meeting or the monetary policy statement.

Based on the outcome, hawkish or dovish, the markets tend to set a general tone of a risk-on or a risk-off sentiment. Typically a risk-off sentiment prevails when there is uncertainty in the markets. Such sentiments see a sell off in risky assets such as the Aussie & Kiwi Dollar as investors turn to safe haven currencies such as the Yen, USD or the Swiss Franc. Conversely, during times of risk-on sentiment, the US Dollar weakens as investors park their money in high yielding currencies such as the Aussie, Kiwi.