US Federal Funds Rate

Be Prepared! US Federal Funds Rate Tomorrow at 18:15 GMT.
We at ForexYard encourage our customers to get involved in the most intense market events. As such, we think you should know that US Federal Funds Rate figures are expected tomorrow, September 16th, 18:15 (GMT), and you need to be prepared. Market events like this one tend to create either big changes to current trends or push current trends even further. Generally, the Majors are the ones most affected by market events in general but Crude Oil, Gold prices, and even the price of Silver can change dramatically in the seconds after such a publication. For more information about the US Federal Funds Rate, please read below.

What is the US Federal Funds Rate?
The US 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 US economy and has a direct impact on supply and demand for the USD.

According to the needs of the US 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 US Dollar. If rates are cut, there will be an increase in the amount of USD in circulation making them grow weaker in value. If rates are increased, the exact opposite happens. Dollars are taken out of the economy to help contain inflation and strengthen the value of the USD.

If the Federal Funds Rate is Decreased

At present, market analysts are forecasting the Federal Funds Rate to be maintained at 2.0%. However, if Interest Rates are cut below the 2.0% mark, this would stipulate that the Fed is going to start buying securities. This might have the effect of lowering the value of the USD against its major currency pairs as traders will start selling USD during its devaluation.

By decreasing the Interest Rates, it stimulates US economic growth by making it cheaper to get a mortgage or buy a car. This entices investors to put more money towards capital in the local economy. However, this change in the Interest Rate is always approached with caution. If rates are cut too far, the rapidly growing economy will force a sharp increase to the rate of inflation. As inflation raises, the cost of goods and services also rise and make the value of the dollar even weaker. When this happens it usually warrants a subsequent increase to the Federal Funds Rate.

Ultimately the Fed is trying to find the target interest rate that balances these factors. Traders should expect a call by the Fed to maintain present rates with a bias towards cutting these rates as the global economy is still witnessing a recessionary move. This should maintain the steady growth the USD has seen in recent weeks versus its major currency rivals.

If the Federal Funds Rate is Increased

Although the current forecast is predicting the Fed to hold Interest Rates steady, there is the possibility of an increase in this figure. If the Fed decides to enact such an increase in Interest Rates, it will begin selling securities. This will limit the amount of US 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 September 2008 seeing as such a move has the potential to cause a recession. Since the US 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 maintain current rates, or to issue a cut in the target rate, than it would be for the Fed to issue an increase in the Federal Funds Rate at this time.

The best way 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.

(forexyard)