Federal Fund Rate is the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight. This operation provides a bulk of liquidity to the banking system.
Short-term interest rates are a paramount factor in currency valuation. This is highly correlated with the economic outlook because its changes can affect both inflation and recession.
The Federal Open Market Committee (FOMC), which is the monetary policy-making body of the Federal Reserve System, has left the interest rate unchanged after it lowered it twice in March 2020 from 1.75% to 1.25% and further to 0.25% in the same month.
A few weeks ago, some experts were openly questioning the continuous need for quantitative easing owing to the recent economic progression from the wrath of the pandemic but that tone has changed given the resurgence of Covid-19 and the disappointing job report for August with just 235,000 compared to the forecast of 733,000.
The market has been attuned to react with inflation mounting pressure as wages is not keeping up with the level of inflation and putting stress on household bottom lines, even though last week’s weaker than expected 5.3% outcome, met with some positivity, it is still 330 basis point above Fed’s target.
With Jerome Powell and company still on the fence whether or not to signal that the Fed would start tapering soon, fear of debt contagion will no doubt push them toward a more cautious, noncommittal outlook. According to Janet Yellen (U.S. Treasury Secretary) on the debt ceiling, “Neither delay nor default is tolerable, as the past 17 months have tested our nation’s economic strength. We are just now emerging from crisis; we must not plunge into an entirely avoidable one”.
Nevertheless, with a tapering move sometime this year less likely, investors will be more concerned about what the Fed will project in its latest quarterly forecasts, and of course, the updated dot plot chart. In the last dot plot, policymakers had penciled in the first post-pandemic rate increase for 2023. But there’s been a notable hawkish shift since then so the median projection might point to a 2022 rate hike, which could give a bit of a lift to both Treasury yields and the US dollar.
The positive remains that, the consumer price index, which measures a basket of common products as well as various energy goods, increased 5.3% from a year earlier and 0.3% from July, as the unemployment rate declined by 0.2% to 5.3% as reported by U.S. Bureau of Labor Statistics, more so that the United States government has taken swift action with respect to curbing the resurgence of Covid-19 as 55.4% has been fully vaccinated.
Across-board, Lower Official Bank Rate will provide a boost to the broader economy by improving cash flow, encouraging spending and investment, which will increase economic activities and boost employment.
Regardless, traders should brace themselves up for a period of high volatility as The Federal Fund Rate report often has a great impact on the FOREX market. An increase in Fund Rate will usually strengthen the United Dollar, while its decrease will usually weaken the United Dollar.
Traders should always be aware that volatile markets provide great opportunities for making profits, as the increase in volatility can cause market swings for traders to capitalize on.
The currency pairs that include the US dollar, US Futures, US indexes, US Commodities, and Shares are mostly affected by the data release. They include EURUSD, GBPUSD, XAUUSD, USDJPY, USDCAD, USDCHF, AUDUSD, NZDUSD, US100, FTSE, US Oil, Facebook, Amazon, Tesla, etc.
Time Schedule for next Fund Rate release:
Date: Wednesday, September 22nd, 2021.
Time: 7:00 pm (GM + 1)
Author: Francis Idowu
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