FED Will Keep The Interest Rates Low As Long As Possible!

Any talk of interest rate increase was culled by the recent FED Chair Janet Yellen speech. For now the market expectation is that FED will keep the interest rates low as long as possible. Since 2008 when the US stock market crashed ushering in a global financial crisis FED has reduced the interest rates as low as possible. FED policy is to keep the interest rates as low as possible for as long as possible for the economic recovery to start. Banks are under tremendous pressure. Most of them bad loans on their balance sheets. Writing these bad loans can affect the health of these banks. Low interest rates are supposed to revive the economy.

Interest rates is one of the most important policy tools at the disposal of a central bank. When the central bank lowers the interest rates, it is considered to be good for consumption and investment in the economy. Central Bank can also use monetary policy to achieve its policy objectives. Federal Reserve official duty is to keep inflation and unemployment low in the US economy. When you try to keep inflation low, unemployment increases. When you try to keep unemployment low, inflation increases. So Federal Reserve or for that matter any other central bank has to make a trade off. Read this post in which Janet Yellen, FED Chairperson says that monetary policy is not the first line of defense.

If you are a currency trader, you should keep an eye on what the central banks are doing. If you trade USD pairs like EUR/USD, GBP/USD, AUD/USD. NZD/USD, USD/CAD, USD/JPY etc then you should keep an eye on what the Federal Reserve is doing. FOMC Meeting is very important. FOMC meeting is held every month to review the health of US economy and decide whether to keep the interest rate same or to increase or decrease it. Interest rates are kept low when the economy is in recession. Interest rates are increased when the economy overheats. Did you read the post EURO zone deflation fears rises? When the interest rate is increased by the FED, USD appreciates and pairs like EUR/USD, GBP/USD fall heavily while pairs like USD/JPY, USD/CAD rise.

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