The Federal Reserve policy that switched to neutral in January completed the circle last month with first decrease in the base rate in more than a decade from a 2.50% upper target to 2.25%. The logic behind the decision, as has been consistent from January, cited external threats to the US expansion, the US-China trade war, Brexit and the generalized slowdown in global economic activity.
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The Fed finally did it – cutting rates for the first time in a decade and reversing the highly controversial rate hike of December 2018. However, the 25 basis point reduction was fully priced in. The bank has been conveying this message for over six weeks and markets speculated about the next moves.
One and done is too much like a campaign slogan for the careful bankers of the Federal Reserve, but that was the message from Chairman Powell in his assessment of the US economy and Fed policy.
Markets have been expecting the Federal Reserve to cut rates for several weeks – and Federal Reserve Chair Jerome Powell more than confirmed it – sending the dollar down.
JUNE FED DECISION review
The FED has left the interest rates unchanged as broadly expected but has also made significant changes that open the door to a rate cut. But is it enough to satisfy markets?
According to the CME Group's FedWatch Tool, following the FOMC's dovish monetary policy statement, markets are now pricing an 88.9% probability of a 25 basis points Fed rate cut in July compared to 68.5% seen on Tuesday.
What's important about Federal Reserve’s monetary policy meeting?
With a pre-set regularity, a nation's Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one, being the interest rate that it will charge on loans and advances to commercial banks.
In the US, the Board of Governors of the Federal Reserve (FED) meets at intervals of five to eight weeks, in which they announce their latest decisions.
A rate hike tends to boost the local currency, as it is understood as a sign of a healthy inflation. A rate cut, on the other hand, is seen as a sign of economic and inflationary woes and, therefore, tends to weaken the local currency.
If rates remain unchanged, attention and also main news and analysis turn to the tone of the FOMC (Federal Open Market Committee) statement, and whether the tone is hawkish, or dovish over future developments of inflation.
How to trade the event?
- Do not rely on the Fed to determine the direction of the dollar in the coming months.
- The dollar tends to follow its predominant trend when the Fed starts to hike rates.
- There is no direct link between the Fed hiking rates and the usd falling. When a weak usd has coincided with a Fed hiking cycle, it has been falling for some time.
- Due to this, we may see a muted reaction to a potential Fed rate hike.
FED educational resources
What is the Fed?
The Federal Reserve System (Fed) is the central banking system of the United States and it has two main targets or reasons to be: one is to keep unemployment rate to their lowest possible levels and the other one, to keep inflation around 2%. The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors, partially presidentially appointed Federal Open Market Committee (FOMC). The FOMC organizes 8 meetings in a year and reviews economic and financial conditions. Also determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. FOMC Minutes are released by the Board of Governors of the Federal Reserve and are a clear guide to the future US interest rate policy.
WHO IS FOMC'S CHAIRMAN?
Jerome Powell took office as chairman of the Board of Governors of the Federal Reserve System in February 2018, for a four-year term ending in February 2022. His term as a member of the Board of Governors will expire January 31, 2028. Born in Washington D.C., he received a bachelor’s degree in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. Powell served as an assistant secretary and as undersecretary of the Treasury under President George H.W. Bush. He also worked as a lawyer and investment banker in New York City. From 1997 through 2005, Powell was a partner at The Carlyle Group.
The World Interest Rates Table
The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.