What is the difference between the Fed and the FOMC?

The Federal Reserve, or Fed, is the whole US central-bank system: a Board of Governors in Washington and 12 regional Reserve Banks. It also supervises banks and runs payment systems. The FOMC is the committee inside the Fed that decides monetary policy, meaning interest rates and the size of the Fed’s bond holdings. When traders say the Fed decided, they mean the FOMC.

What does priced in mean in forex?

Priced in means the market has already moved to reflect an event that traders expect. If almost everyone expects a rate cut, the dollar has usually weakened before the meeting, so the cut itself changes little. Only news that differs from expectations moves the price on the day. This is why a currency can fall on what looks like good news.

Does gold go up when the Fed cuts rates?

Often, but not always. Gold pays no interest, so lower rates make it more attractive to hold, and cuts often weaken the dollar, which also helps gold. But if the cut was fully expected, gold may already have risen before the meeting and can fall afterwards. A cut that comes with a hawkish message about future policy can also push gold down.

Is it a good idea to trade the FOMC announcement as a beginner?

Usually not. Spreads widen at 2:00 p.m. Eastern Time, stop-losses can be filled at worse prices, and the first move often reverses during the press conference half an hour later. Watching a few meetings on a demo account without trading is a good way to learn the pattern. If you do trade, use a much smaller size than normal.

FOMC Meetings Explained: How Fed Rate Decisions Move Forex

Advanced8 min read

What is the FOMC meeting?

The FOMC is the Federal Open Market Committee, the group inside the US Federal Reserve (the Fed) that sets US interest-rate policy. It holds eight scheduled meetings a year and announces each decision at 2:00 p.m. Eastern Time. Because the dollar is on one side of most currency trades, these decisions move forex pairs, gold and share markets worldwide.

The committee has 12 voting members: the seven governors of the Federal Reserve Board, the president of the Federal Reserve Bank of New York, and four of the other 11 regional Reserve Bank presidents, who rotate yearly. Its main tool is the federal funds rate, the rate at which banks lend to each other overnight. Changes normally come in steps of 0.25 percentage points, or 25 basis points.

What happens on FOMC decision day?

Meetings last two days. The public action comes on the second, usually a Wednesday.

2:00 p.m. ET, the statement: a short text with the rate decision, the vote and a view of the economy.
2:00 p.m. ET, the projections: at four of the eight meetings (March, June, September and December) the Fed also publishes its Summary of Economic Projections, which includes the “dot plot”.
2:30 p.m. ET, the press conference: the Fed Chair reads a statement, then takes journalists’ questions.
Three weeks later, the minutes: a fuller record of the discussion, which can move markets if it shows more disagreement than expected.

2:00 p.m. ET is 19:00 UTC in winter and 18:00 UTC during US daylight saving time. In Singapore and Kuala Lumpur that is 3:00 a.m. or 2:00 a.m. the next morning. The market hours tool shows session times in your own time zone.

Hawkish vs dovish: what do they mean?

The US Congress gave the Fed two goals, known as the dual mandate: maximum employment and stable prices, which the Fed defines as inflation of 2% a year. It raises rates to cool inflation and cuts them to support jobs. “Hawkish” and “dovish” describe which worry is winning.

Hawkish: leaning towards higher interest rates, or keeping them high for longer, because inflation is the bigger worry. A hawkish surprise usually lifts the dollar.
Dovish: leaning towards lower rates, because growth and jobs are the bigger worry. A dovish surprise usually weakens the dollar.

Tone matters as much as action. A “hawkish cut” is a rate cut with a warning that more are not assured. A “dovish hike” is a rate rise with a hint that it may be the last. The dollar reacts because money flows towards higher interest, the same force behind the carry trade. Between meetings, the data that matter most are inflation (see our guide to CPI and forex) and jobs (see the non-farm payrolls guide).

Why can the dollar fall after a rate rise?

Markets trade the future, not the announcement. The Fed signals its plans in advance, so by decision day an expected move is already in the price. Traders call this “priced in”. What moves the market is the surprise, the gap between what the Fed says and what traders expected.

Suppose traders fully expect a rise of 0.25 percentage points and think two more will follow. The Fed delivers the rise, but the Chair says policy is now close to where it needs to be. The rise was not news. The hint that rises are ending is news, and it is dovish. The dollar falls, and traders who bought it in the weeks before take profit, which adds to the fall. This is the old saying “buy the rumour, sell the fact”.

How to gauge what the market expects

Interest-rate futures: contracts whose prices show where traders think the Fed’s rate will be in the coming months. News sites turn these prices into a probability for each outcome, such as “a 90% chance of no change”. When it is that high, the decision itself will not be the story.
Analyst consensus: an economic calendar shows the forecast rate next to the previous one.
The dollar’s recent path: a strong rise into the meeting means good news is priced in, so the bar for further gains is higher.

What traders read in the statement, dot plot and press conference

The statement changes little from one meeting to the next, so traders compare it line by line with the last one. A single changed word about inflation or jobs can move the dollar.

The dot plot is a chart on which each Fed policymaker marks, without a name, where they think the policy rate should be at the end of each of the next few years. Traders focus on the middle dot, the median. If it shows fewer cuts than three months earlier, that is hawkish. The dots are opinions, not promises, and have often been wrong.

The press conference is unscripted, which makes it the riskiest part. Traders listen for how the Chair describes the balance of risks and for any hint about timing.

The balance sheet matters too. Quantitative easing (QE) means the Fed creates money to buy bonds, which pushes long-term interest rates down and tends to weaken the dollar. Quantitative tightening (QT) is the reverse: the Fed lets its bond holdings shrink, which drains money from the system and tends to support the dollar.

How do markets move around the announcement?

The hours before: quiet, narrow ranges.
2:00 p.m.: machines read the statement in milliseconds. The spread, the gap between the buy and sell price, widens, price spikes, and stop-loss orders (which close a losing trade) can be filled at a worse price than you set, which is called slippage.
2:30 p.m. onwards: the Chair speaks and the first move is tested. The 2:00 spike often reverses fully during the press conference, sometimes more than once.
The next day: Asian and European traders react, and the move may extend or reverse again.

Our guide to trading the news covers these mechanics in general.

Which markets react most to the Fed?

USD/JPY is often the most sensitive major pair, because it follows US interest rates closely, and the broad move is easiest to see on the US Dollar Index (DXY). Gold pays no interest, so a dovish surprise tends to lift XAU/USD and a hawkish one tends to hit it. Share markets react too, and with them risk-sensitive currencies such as AUD and NZD.

Do other central banks work the same way?

Broadly, yes. The European Central Bank, the Bank of England and the Bank of Japan also hold eight policy meetings a year. The ECB publishes its decision and then its President holds a press conference. The Bank of England publishes its minutes and the vote split of its nine-member committee together with the decision, so a close vote can move the pound more than the decision itself. The Bank of Japan has no fixed announcement time. The logic is the same everywhere: the surprise moves the currency.

Three ways to handle FOMC day

Stay flat: hold no dollar or gold positions from shortly before 2:00 p.m. until the press conference is over. Risk note: a spike that reverses minutes later can still hit the stops of longer-term trades you keep.
Hold with smaller size: cut the position and widen the stop. On a $10,000 account you might normally risk 1% ($100) with a 40-pip stop on EUR/USD, which is 0.25 lots (25,000 units) at about $2.50 a pip (a pip is the smallest standard price step). For the Fed you risk 0.5% ($50) with an 80-pip stop: 50 ÷ 80 = $0.625 a pip, so 0.06 lots, risking about $48. The position size calculator does the sum. Risk note: slippage can still enlarge the loss.
Wait for the press conference to end: trade only once spreads are normal and a direction has survived the Chair’s answers, with a stop beyond a clear level. Risk note: you miss the first move, and the next day can still go against you.

Some brokers raise the deposit they require (margin) or widen spreads around Fed decisions, so check this when you compare regulated brokers.

Knowing how the FOMC works cannot tell you what the Fed will say or how traders will read it. Forex and CFDs carry a high risk of loss, and that risk is higher than usual around central-bank decisions. Only risk money you can afford to lose.