U.S. Federal Funds Rate – January 2009
January 28th, 2009 Posted in Market Movers
The U.S. Federal Funds Rate, or Interest Rates, is the rate at which banks lend balances held at the Federal Reserve to other banks overnight. This figure is released 8 times each year. It is important because short-term interest rates are the leading factor in determining the value of a currency.
In fact, most other economic indicators are used by traders to speculate about the future movement of these interest rates. This figure is decided on by the members of the Federal Open Market Committee (FOMC) who vote on where to set a “target rate,” because the actual rate is set by the open market. It is a mechanism used by the Federal Reserve to regulate the supply of money in the U.S. economy and has a direct impact on supply and demand for the USD.
According to the needs of the U.S. economy, the FOMC will elect to increase, decrease, or leave the rate unchanged. Traders pay close attention to this figure as it has a strong correlation with the value of the U.S. Dollar.
If the Federal Funds Rate is Decreased
At present, market analysts are forecasting the Federal Funds Rate to maintain a rate close to 0% from its current level of 0.25%. If this happens it would indicate that the Fed will continue to buy securities on the open market. This will likely have the effect of lowering the value of the USD against its major currency pairs as traders will start selling USD during its devaluation.
Ultimately the Fed is trying to find the target interest rate that balances many factors. Traders should expect a call by the Fed to lower the present rate as the recession is weakening the buying power of most Americans and action must be taken to stave off further disaster. Traders can look to the USD to depreciate to near the 1.3400 price level in the event of a rate reduction.
If the Federal Funds Rate is Increased
Although the current forecast is predicting the Fed to lower interest rates, there is the possibility of an increase in this figure. If the Fed decides to enact such an increase, it will begin selling securities. This will limit the amount of U.S. currency in the market. If the Federal Funds Rate will indeed be increased, the upward momentum of the USD will take off as its value becomes much stronger versus its currency rivals.
This result is less likely for January 2009 seeing as such a move has the potential to increase the deepening U.S. recession. Since the U.S. economy is currently witnessing a recessionary move, an action such as this is not likely. It is far more possible that the Fed will indeed issue an order to hold rates fast, or decrease them, than it would be for the Fed to issue an increase in the Federal Funds Rate at this time.
The best way for ForexYard traders to capture profits from the announcement of these rates is to be aware of their impact on the strength of the USD and trade accordingly.
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Tags: economic indicators, Federal Funds Rate, Forex Trading, Indicator Reports, interest rate cut, interest rates, rate cut, The US Dollar, US Federal Funds Rate, USD Trading
