Ever ask yourself what is the Federal Reserve FOMC meeting and how does it affect the markets? I know I have. I always thought it was more related to the macro environment and didn't think that as a crypto trader, I needed to know anything about it. Even in my days of trading stocks, I really only paid attention to the fundamentals of the companies I was trading and didn't pay much attention to the macro stuff. I left that to the bankers.
But, it just so happens that the Federal Reserve's FOMC meeting affects all markets in one way or the other, so as a trader, you need to be aware of what it means for the different markets that you are trading. Let's break it down in simpler terms.
So, What's the Deal with FOMC Meetings?
Think of them as the Federal Reserve's version of a strategy session. The FOMC, or Federal Open Market Committee, is like the decision-making board members of the Fed. They gather regularly to chat about how the economy is doing and what actions might be needed to keep things on track.
Understanding Interest Rate Moves
Now, when they start talking about making moves in interest rates, they're essentially discussing tweaking the cost of borrowing money. Imagine borrowing cash from a friend, and they decide whether to charge you interest or not – that's the basic idea. Now you will hear the talking heads or anons on social media using terms like 'Hawkisk' or 'Dovish' and they just expect you to understand what it means. So here's what they mean...
Hawkish Moves
When the FOMC takes a hawkish stance, it means they're a bit concerned about inflation or the economy heating up too much. So, they might decide to crank up interest rates to cool things down a bit. This can make borrowing more expensive, which in turn can slow down spending and sometimes put a damper on the stock market's vibe.
Dovish Moves
On the flip side, when the FOMC decides that they are dovish, they're feeling pretty relaxed about things. They might lower interest rates to give the economy a bit of a boost, encouraging people to borrow and spend more. This can give the stock market a bit of a lift and make borrowing cheaper for everyone.
Impact on Different Markets
So now that I have laid out a basic understanding of what is happening here, I want to get into how it affects all financial markets, yes, even the crypto markets. Being that my main trading and investing focus is in this space, I'll start here.
Cryptocurreny Market
Cryptocurrencies can get pretty jumpy after FOMC meetings. If the Fed hints at raising rates, crypto prices might take a dip as folks worry about being in riskier investments. But if they're all about keeping rates low, crypto could get a boost as investors look for higher returns. Bitcoin was thought to be a hedge against inflation, and which in case of the supply issue, it theoretically is, but, it is still a very volatile market and is considered a risk-on asset. And, that's even with Wall Street finally giving the nod to Bitcoin, I won't even get into the rest of the market, but you get the idea.
Stock Market
Stocks will quickly let you know the mood of the economy overall, especially the big boy blue chip stocks. When the Fed decides to go hawkish, stocks might get a bit gloomy as borrowing costs rise. This can mess with companies ability to use leverage in a profitable manner and cause business expansion to slow down. But if the FED is feeling dovish, stocks could be all smiles because cheaper borrowing fuels spending and growth.
Forex Market
Fiat currencies around the world like to dance to the beat of interest rates. A stronger dollar can come from having higher interest rates. This can make imports cheaper but exports pricier. Lower rates, on the other hand, can weaken the dollar, making American goods more attractive abroad as they are a bit cheaper.
This is why it's cheaper for Americans to import goods from other countries that have weaker currencies. The labor and cost of supplies are way cheaper in countries with weaker currencies. This causes other issues down the line in the greater economy that I won't get into in this post.
Commodities Market
Whether it's gold, oil, or soybeans, commodities feel the heat too. Higher rates can crimp demand and push prices down, while lower rates might send prices soaring as folks expect a boost in economic activity and are willing to get out and spend more.
In a nutshell, Federal Reserve FOMC meetings and interest rate moves may sound like big fancy talks, but they're basically just the Fed's way of tinkering with the economy to keep things running smoothly. It's really kind of basic economics when you come to think of it and should be something that every trader, and really anyone interested in what is happening with the money supply, needs to know.
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Additional Blog Locations
Many of my cryptocurrency related articles as well as trading articles can also be found on my crypto research site, Coin Logic.
I also post trading chart ideas on my TradingView Profile.
Disclaimer:
The information in this trade journal is for educational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.
