The US Congress established the Federal Reserve System (the Fed) in 1913. The US Dollar is used in many transactions, and the Fed’s actions and policies significantly influence currency value. Learn about the Fed’s past, how it affects the USD, and how to trade the Fed’s monetary policy choices.
WHAT DOES FEDERAL RESERVE MEAN?
The Federal Reserve is the nation’s central bank. It was established to provide the country with a secure, adaptable financial and monetary system. Its primary responsibilities are monitoring efficient, economical operation and establishing monetary policy, eventually acting in the public interest.
The Fed carries out five broad tasks to fulfill these high-level instructions:
- Encourage long-term stable pricing, high employment, and low-interest rates
- To establish a stable financial system, reduce risk wherever feasible.
- Improve security in financial institutions.
- Promote security in payment and settlement systems.
- Encourage the use of a supervisory approach to safeguard consumers.
The country is split into 12 Federal Reserve Districts, each of which is serviced by a Reserve Bank that has its independent incorporation to carry out daily activities. The Federal Reserve Board of Governors supervises these districts’ and member banks’ autonomous operations.
Who owns the Federal Reserve?
The Fed is a hybrid of private and public ownership. The member banks of the Board of Governors own equity and receive dividends, whereas the Board of Governors is a government organization.
Who is the Chairman of the Federal Reserve?
As of August 2019, Jerome Powell, who has held this position since February 5, 2018, is the Chairman of the Federal Reserve. He will hold the office for the 16th time and have a four-year tenure. From May 25, 2012, until his nomination, Mr. Powell was a member of the Board of Governors.
In addition, he presently oversees monetary policy as the Chairman of the Federal Open Market Committee.
What banks are part of the Fed?
Each of the 12 Federal Reserve Districts has a Reserve Bank.
- New York
- Saint Louis
- San Francisco
How is the Fed held responsible for doing its duties?
Both the US Congress and the general public may hold the Fed responsible. Establishing monetary policy is straightforward and open, and both the Chair and Federal Reserve personnel testify before Congress. The Federal Open Market Committee (FOMC) will release remarks after each annual meeting in the interest of transparency. To maintain financial responsibility as well, every financial statement is professionally audited once a year.
PRIMARY ECONOMIC MANDATES OF THE FEDERAL RESERVE SYSTEM
The primary goal of the Federal Reserve bank is to implement US monetary policy. Congress has laid forth the legislative goals of its monetary policy, which are:
- Maximum employment: The FOMC’s monetary policy should seek to keep unemployment low while supporting the economy where it is required to help firms prosper, turn a profit, and expand by hiring additional personnel.
- Price stability: The Federal Reserve defines price stability as long-term inflation of no more than 2 percent.
- Moderate long-term interest rates: Long-term interest rates that are moderate This goes hand in hand with price stability; in a stable economy, long-term interest rates stay around a reasonable level.
Through its control over interest rates and the whole financial environment, the Fed seeks to implement its monetary policy. As a result, the US dollar may fluctuate before Fed statements and policy adjustments.
Committee for the Federal Open Market
The Federal Open Market Committee (FOMC), which is in charge of the Federal Reserve System’s open market operations, determines monetary policy. At FOMC meetings, they determine a goal for the federal funds rate or the interest rate that banks should charge one another for overnight loans. The FOMC has three essential methods to affect the rate even if it is not under its direct control:
Bond purchases help the economy by reinvesting funds, which lowers interest rates.
- Discount rate: This is the rate that banks must pay the Fed to borrow money. When this rate declines, there is a greater likelihood that the federal funds rate will follow suit.
- Reserve requirements: The reserve requirement tells banks how much of their clients’ deposits they must maintain on hand to meet withdrawals. Banks are forced to charge higher interest rates when these go up since they can’t lend as much money. Banks may lend more money and demand lower interest rates while lending less money.
HOW IS THE US DOLLAR AFFECTED BY THE FEDERAL FUNDS RATE?
The Federal Reserve Board of Governors determines the interest rate for the Fed, usually referred to as the Fed funds rate. The value of the US Dollar may be impacted by both the present interest rate and forecasts for future interest rate adjustments. The Dollar may appreciate or depreciate versus other currencies if traders assume that the Board of Governors’ pronouncements will change interest rates.
HOW TO TRADE FED DECISIONS ON MONETARY POLICY
Traders should take the following two essential actions to be ready for Fed rate change decisions:
- Keep up with news from the Fed: The FOMC meets regularly eight times a year to debate and decide on policies and interest rates. The most straightforward approach to forecasting interest rates and whether to buy or sell the US dollar is to stay current with the news before these meetings.
- Keep up with news from the market: You can be sure that many other people will be speculating on interest rates in the days and weeks leading up to Federal Reserve meetings and releases. Keep an eye out for other people’s forecasts and predictions, and ensure you’re knowledgeable enough to establish your judgments and support them with your reasoning.
Surprises can happen, and no system of forecasting interest rate choices can be 100 percent correct. Placing stops in advance can help you limit your losses should the markets go against you. Protecting yourself is always vital when trading forex.
Always follow your trading strategy and avoid entering trades where you can’t afford to lose money. Trades may be reciprocal. No matter how certain you are that things will go your way, anything might go wrong.