FOMC (Federal Open Market Committee)

The FOMC is the policy-setting body of the US Federal Reserve. Because the US dollar is on one side of most forex trades, its decisions are among the most closely watched events in the market.

Who sits on it

The committee has twelve voting members: the seven members of the Fed's Board of Governors, the president of the Federal Reserve Bank of New York, and four of the other eleven regional Reserve Bank presidents, who vote on a rotating basis. Non-voting presidents still attend and take part in discussions. The Fed chair also chairs the FOMC.

What it decides

• The target range for the federal funds rate, the overnight lending rate between banks, moved in steps measured in basis points.
• The size and pace of changes to the Fed's balance sheet, including quantitative easing or its reversal.
• The wording of its statement and its forward guidance.

The meeting cycle

There are eight scheduled meetings a year, each ending with a statement and a press conference by the chair. At four of them the Fed also publishes its Summary of Economic Projections, including the "dot plot" of members' rate expectations. Minutes follow about three weeks after each meeting. The schedule is published in advance on the Fed's website.

Worked example

Illustratively, futures markets price a 90% chance of a 25 bp cut. The FOMC cuts by 25 bp but the dot plot shows fewer cuts next year than expected. The dollar may rise despite the cut, because the hawkish guidance outweighs the expected decision.

See central banks and interest rates.