FOMC (The Federal Open Market Committee)
The Federal Open Market Committee (FOMC) is the policy making branch of the Federal Reserve Bank in the United States. It meets eight times a year to analyze the current market situation and make decisions based on its findings. The decisions made by the FOMC will have direct impact on the funds held by the Fed, causing ripple effects in the market. The decisions by this committee are eagerly awaited by the financial industry.
The FOMC is comprised of 12 members. Seven of them are appointed by the President of the United States from the Federal Reserve Bank Board. Another seat goes to the New York Reserve Bank president who has a permanent seat in the committee. The last four seats are rotated among the remaining reserve bank presidents around the country. Each president will have voting rights for one year before another president takes their place to ensure even representation.
During the meetings, committee members will present their findings about current market conditions together with their projection. For example, a member from California might present a study about technology trends while another member might talk about the Mercantile Exchange. All findings will be taken into consideration. The voting members would discuss and make a decision on the federal interest rate and, if it is necessary, to buy or sell securities to decrease or increase the amount of available currency.
The main objective of the FOMC is essentially to sustain a healthy economy with reasonable interest rates, low inflation and low unemployment rate. Decisions made by FOMC members are reached behind closed doors. Aside from the eight scheduled meetings, the FOMC can also facilitate emergency meetings on short notice. It can then make rapid decisions to fend off possible instability in the American economy.
FOMC and Gold
The FOMC may significantly affect the gold market, as it sets interest rates and other parameters of monetary policy. Gold is a non-yield-bearing asset, so it is sensitive to changes in interest rates. The yellow metal also serves as a safe-haven asset, so it reacts to signals sent by the FOMC members about the condition of the U.S. economy. This is why gold prices are often moved by the FOMC monetary policy statements or the minutes of its meetings. In the Fed’s tightening cycle started a few years after the Great Recession, gold prices have been strongly correlated to market expectations of future FOMC actions, or the pace of interest rate hikes. When the FOMC is more dovish than expected, the price of gold often rises, as it implies a slower pace of tightening and lower real interest rates. On the contrary, when the FOMC is more hawkish than expected, gold prices often decline, as it suggests a more aggressive normalization of the monetary policy and higher real interest rates.
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