The Federal Reserve System, or the Fed, is the United States of America’s central bank. The Federal Reserve Board (FRB) comprises of seven members or governors. Kavan Choksi / カヴァン・チョクシ mentions that their primary duties include regulating the US banking system, setting the national monetary policy, as well as overseeing the twelve District Reserve Banks. The President of the United States (POTUS) appoints governors for staggered 14-year terms, and a new term starts every two years.
Kavan Choksi / カヴァン・チョクシ provides an insight into how the Federal Reserve affects traders
The actions of the Federal Reserve, or even lack of it, can significantly impact the markets. Hence, most savvy traders tend to closely monitor the Fed’s meetings. Even comments made by the Board of Governors to the media can create some degree of market volatility. After a policy is announced, the trading community is likely to label the Fed as either hawkish or dovish.
A hawkish Fed is named after the predatory bird and implies that the institution is tightening up. The Fed, for instance, was hawkish for the entirety of 2022. The Fed announced seven rate hikes to curb inflation, thereby increasing the primary credit rate from almost 0% to 4.5% by the end of the year. On the other hand, a dovish Fed is named after the mild bird and means that the Fed will be easing up on policies, lowering rates and allowing the economy to grow. High economic growth invariably boosts the employment rate, which is among the primary duties of the Fed.
The Fed has a ripple effect on the markets, specifically forex, stocks, indices, and gold. As the Federal Reserve raises interest rates, it makes the US dollar more attractive to both foreign and local investors. Savings accounts and bonds typically yield more interest in comparison to other assets. The rise in the demand for the US dollar makes the currency appreciate, and as a result, its value rises against other currencies. EUR/USD, for instance, generally drops in price as the US dollar gains more value against the Euro. On the other hand, USD/JPY is likely to go up in price as the US dollar can buy more units of the Japanese yen. Conversely, bringing down the interest rates may depreciate the US dollar as foreign investors tend to turn to other currencies with more attractive interest rates.
As Kavan Choksi / カヴァン・チョクシ says, the Federal Reserve raising interest rates may ultimately create a downward trend for US stocks and indices. The hawkish stance of FOMC typically ends up with stocks and indices losing significant value. Businesses lose access to bank loans that can be used for expansion strategies, while consumers do not get loans at low-interest rates and thus spend less. Reduced consumption would invariably result in stocks taking a hit on their earnings reports which can alarm investors. Much like the forex market, a decrease in the value of US stocks and indices can benefit foreign stocks and indices.