Forex Questions and Answers - FXAnswer

The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements.

The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

Source(s):

http://www.federalreserve.gov/monetarypolicy/ fomc.htm

Mainly interest rate decision.

If the Fed chooses to alter its key lending rate, it immediately and directly has corresponding, cascading effects, because the steps that the Fed takes must be followed by banking and other financial institutions to keep up. Also, if the Fed decreases the interest rate for savings, then people have less incentive to put money away and will spend it in the market instead. If the Fed makes the interest rate higher for having to repay loans, then fewer businesses will borrow and will be strapped to obtain capital by other means.
Hence by adjusting the rates it affects 3 general areas namely :
1)Banks and financial institution lending rate.
2) Spending power of the people
3) Businesses reaction to interest rate hikes.
These three effects the Forex market.