Trading Strategies: The Federal Open Market Committee (FOMC)
Assessment question:
Central banks set monetary policy at regular intervals throughout the year. It is necessary as a trader to take a view on what the outcome of the upcoming meeting will be.
Try and determine the outcome of the next meeting of EITHER the Bank of England, Federal Open Market Committee or the European Central Bank.
It is important to review the last meeting and any factors that may influence policy in-between then and now.
GUIDELINES & MARKING CRITERIA
Your essay should clearly demonstrate analytical, critical and evaluative skills and address your chosen central banks path of monetary policy for the current meeting and the foreseeable future.
Evidence is expected of a wide background of reading and research, without which above average grades are unlikely. All references should be acknowledged (see Library hand out on reference styles – Harvard approach is strongly recommended) However when quoting central bankers name and time of comment will be fine. Good standards of written English and presentation are expected and marks will be deducted if such standards are not met. Your essay should include a separate introduction and conclusion.
In summary:
Examine the central banks path up to the current meeting
Explain what the central banks will be looking at to determine their decision
Discuss what trading strategies could be employed with your conclusion on where policy will be set at the next meeting.
Support your arguments with figures, charts, tables and central bank speakers.
Offer suggestions on what you think should happen if it is different to what you think will happen.
PRESENTATION AND LENGTH
The essay should be typed on A4 paper, Times New Roman, 12 point font, aligning text to both left and right margins, double spacing and should be up to 2000 words, excluding the reference page(s), bibliography and appendices (if applicable).
Marks will be deducted for excessively short or lengthy essays. Separate word counts should be displayed on the opening cover of each individual coursework.
The essay should have attached the official cover sheet with the student number, course, module number and title. Please keep a copy of the essay for your own records.
PLAGIARISM
“Plagiarism is the practice of presenting thoughts, writings or other output of another or others as original, without acknowledgement of their source(s).” All material used to support a piece of work, whether a printed publication or from electronic media, should be appropriately identified and referenced and should not normally be copied directly unless as an acknowledged quote. Text translated into the words of the individual student should in all cases acknowledge the source. For further information please see:
http://www(dot)sussex(dot)ac(dot)uk/s3/?id=35&jquery=off
Before submitting the essay, you should check through it to ensure that:
any material that has been identified as originally from a previously published source has been properly attributed by the inclusion of an appropriate reference in the text;
direct quotations are marked as such (using “quotation marks” at the beginning and end of the selected text); and
citations are included in the list of references.
Trading Strategies: The Federal Open Market Committee (FOMC)
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Trading Strategies: The Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) executes monetary policy for the Federal Reserve System of the U.S (Hernández-Murillo and Shell, 2014). It is charged with setting monetary policy. As long as the economy grows gradually and inflation remains at an acceptable rate, few individuals give much attention to FOMC. However, when economic volatility occurs, the committee becomes more prominent. It is essential to note that FOMC holds eight meetings per year. The outcomes of the meetings are critical to investors, shoppers, and workers. This is because the decisions FOMC makes affect all the aspects of the U.S. economy. FOMC is mainly charged with ensuring the growth of cash supply, ensuring the liquidity during times of crisis and maintaining the integrity of the entire financial system. FOMC can make changes on the growth of the country’s money supply which in turn affects the availability of credit and interest rates. Such changes determine the growth of the economy and employment (Trevisani, 2019). Hence, it is essential to examine the changes that have taken place since the last meeting to determine a possible outcome of the next meeting.
Summary of the Previous Meeting
FOMC held the previous meeting on March 19-20, 2019. It declared that the economy had changed slightly since their last meeting held on January 20-30, 2019 (Federal Reserve System, 2019). FOMC held that the labor market was doing well, although the economic growth had slowed from its solid rate since fourth quarter. Secondly, FOMC observed that payroll employment changed little in February. However, since that time, job gains have remained steady. At the same time, the rates of unemployment have remained relatively low. Thirdly, the Committee members noted that business fixed investment and household spending grew at a slower rate. Additionally, the members noted that the overall inflation had reduced, mainly because of lower energy prices. Lastly, FOMC indicated that indicators of inflation compensation remained low in the previous months.
Given the above observations, FOMC made several announcements. Firstly, the Committee indicated its willingness to ensure maximum employment and price stability. As a result, the members decided to maintain the target fed fund rates at 2-1/4 to 2-1/2 percent (Federal Reserve System, 2019). Secondly, the members considered the global developments in finance and economy as well as muted inflation pressures. Due to these issues, the members decided to remain patient before making future adjustments on the fed interest rates (Tumin, 2019). Thirdly, the Committee members voted unanimously on maintaining the interest rate paid on excess reserve balance at 2.40% (Federal Reserve System, 2019). Lastly, eleven of the 17 officials held that the Fed would not increase the interest rates for the whole of 2019. The remaining six members hinted an increase of between one and two percent of the Fed interest rate in 2019. A majority of the officials predict one more hike in the next three years.
The Next Meeting
FOMC would have the next meeting on April 30-May 1, 2019. In the previous meeting, FOMC allowed the fed funds rate to remain at 2.5%. It decided to leave the rate unchanged because it did not consider both the growth and inflation to be strong enough to trigger a rise. Given that the current economic growth, inflation, and unemployment are satisfactory, the Committee will probably not raise the rates in this meeting. FOMC has a goal to attain a 3% fed funds rate by the end of 2019. Maintaining a rate of 2.5% in this meeting will allow the Committee to achieve this target.
What FOMC will Consider Determine their Decision
In determining the adjustments to make during the April 30-May 1, 2019 meeting, FOMC will begin by assessing the already realized economic conditions after the last meeting. The members will also look at the expected economic conditions in the coming months. The assessment will consider the wide range of information available. The Committee members will look at information about the labor markets, inflation pressures and expectations and the financial developments in the country and other international developments (Seifried, 2019). The availability of this information will allow FOMC members to decide on which adjustments to make for the April 30-May 1, 2019 meeting.
An examination of the summary of economic projects (SEP) for the year 2019 and the subsequent years gives an insight on how the Committee is likely to make decisions. The SEP for the future years indicates less growth than the December 2019 projections. For instance, the projected GDP is down in subsequent years. In 2019, the projected change in real GDP is 2.1, while it is 1.9 and 1.8 in 2020 and 2021 respectively (Federal Reserve System, 2019). At the same time, the unemployment rate numbers have increased. For 2019, the unemployment rates are projected at 3.5. However, the rate is projected to increase to 3.6 and 3.8 in 2020 and 2021 respectively. PCE inflation projection went up from 1.8 in 2019 to 2.0 in both 2020 and 2021. However, the Core PCE inflation remained at 2.0 in all the years (Federal Reserve System, 2019).
During the press conference held after the last meeting, the Fed chair, Jerome Powell indicated that the Committee members did not envision data coming in to compel them to move in either direction. Further, the chair noted that the members would remain patient and allow the situation to clarify itself over time. In essence, the chair indicates the need to appreciate that it is a “pause period.” The trend shows that there is a zero chance of the Fed rate-hiking in 2019. Hence, this is not likely to change in the April 30-May 1, 20...