The aim of this post is to show how the current federal funds rate operation differs from its pre-crisis model and how it is important to Forex traders.
When things were simple (before 2008), the Federal Reserve set its target federal funds rate
(FFR) as a single number and made sure that the effective federal funds rate
(EFFR) is at the target level by performing open market operations
(OMO). Those OMO normally included repurchase agreements
or RP) to temporarily increase the reserves supply in the federal funds market
(FFM) (and thus reduce the demand and the EFFR) and reverse repurchase agreements
(RRP) to temporarily decrease the supply of reserves and drive the EFFR up. It worked very well because the total size of bank reserves was rather small ($15 billion) in pre-crisis times.
Nowadays, when the Fed is holding $2.27 trillion
in reserve balances (as of March 27, 2017), the old scheme would not fare so well. There is no scarcity of reserve balances at all. To create it, the Fed would need to sell a big share of its securities to shrink the total reserves to manageable size. But that would create some problems — it would drive down the prices of those securities and would launch a series of unpredictable market feedback loops. Instead, what the Fed is doing since 2008 is setting a target FFR as a range between two interest rates. For example, it is 0.75%-1.00% as of today while the EFFR, measured as volume-weighted median, was at 0.91% during the last 3 days.
The Fed makes sure that the FFM respects the target bounds by setting the interest on excess reserves
(IOER) to the top boundary rate. When 95% of the reserve balances are the excess balances (balances exceeding the required level), the IOER rate paid by the Fed to the banks for holding these reserves serves as the ceiling for the rate corridor. It may sound counter-intuitive, because IOER would have been a floor level if only the FFM was composed only of the banks. However, it is not the case. The government-sponsored enterprises
(GSE), such as Fannie Mae, Freddie Mac, and Federal Home Loan Banks, comprise the bulk
of the FFM. GSEs do not earn IOER on reserve balances kept at the Fed. This creates an arbitrage opportunity for banks to borrow from GSEs and allocate the funds with the Fed to earn IOER. Consequently, the interest rate of GSE's loans to banks should be below IOER.
And how about the floor of the rate range (the 0.75%
part of today's target range)? It is enforced by the Fed through the OMO called overnight repurchase agreement
(ON RRP). With it, the Fed can drain some reserves from the system by borrowing cash from market participants, giving them securities as a collateral. Since not only banks can earn interest on their funds with ON RRP (GSEs can also do it), this sets the de facto
lower boundary for the EFFR. Who would lend at a lower rate if they can choose to get at least this rate from the risk-less loan to the Fed? One important feature of the current system is that the EFFR does not cling to the upper side of the rate range (IOER) but hovers below it, falling down to near the ON RRP rate during the final day of the month. The reason for the former is that the banks pay higher FDIC insurance fees
when they borrow more. And the reason for the latter is that the banks need to follow the Basel requirements
, which limit their leverage, but are calculated based on the end-of-month balance sheet.
As a result, we can see the EFFR fluctuating between ON RRP and IOER — well within the boundaries of the Fed's target FFR. The short-term interest rates (represented by the 3-month Treasury bills) roughly follow the EFFR, which means that the interest rates get propagated beyond the FFM. Note the EFFR spiking down on each last day of the month: EFFR inside target FFR range with 3-month Treasury Bill rate for comparison
Relation to Forex
So why should Forex traders care about this? Because effective federal funds rate and the Fed's ability to uphold it are even more important for the US dollar than the target rate set by the Federal Open Market Committee
at its meetings. It is the higher EFFR that would stimulate banks buying more USD to park it either with the Fed or with the GSEs. It is the lower EFFR that would let banks to use the USD as a carry trade
short side. Now you see that any significant news concerning GSE regulations
, Basel III requirements
, or FDIC insurance fee policies
could have tremendous influence on the USD rate based on how such news could affect the EFFR. As a currency trader, you have to be up-to-date with the expectations of the FFM participants regarding those three components. I recommend the following resources to stay up-to-date with those topics:
Of course, you can also use some financial news outlet of your choice that would cover all these topics.
Les meilleurs courtiers Forex avec les spreads les plus bas sur le marché Forex en 2020. Les courtiers low spread vous permettront de négocier avec les conditions les plus préférables. Le courtier Forex ajoute également un écart à la propagation du marché pour gagner de l’argent. En principe, le commerçant obtient ainsi une exécution sur un prix plus mauvais sur le marché. La différence entre l’ouverture des commandes et le prix du marché actuel est le bénéfice du courtier. Plus de 5000 milliards de dollars s'y échangent chaque jour, ce qui en fait le marché financier le plus vaste et le plus liquide du monde. Le Forex étant un marché de gré à gré (OTC, over-the-counter) gigantesque et décentralisé, il est nécessaire de bien se renseigner avant de choisir son broker Forex. For de cades m any authors criticized the ... back propagation to pay attention to the nonlinear relationships. ... In this paper we investigate and design the neural networks model for FOREX ... Four important Forex currency pairs are investigated and the results show consistent success in the daily prediction and in the expected profit. ... com/index.php/tra de-the-forex-market-without ...
What's up! I'm Hannah and I'm learning how to trade the forex markets. Join me as I document my forex trading journey through film, sharing the ups and the d... Program Educational si Tranzactionare Forex: - Cursuri in format text si video - Mentorat privat - Oportunitati zilnice de tranzactionare - Canal privat Tele... Curso de Forex Gratis y Completo Más Cursos en https://www.nexsson.com/ :) Indice Curso Forex: 0:00 Introducción - Curso de Forex 6:01 Velas Japonesas - ... Mejores Brokers de Forex 2019 - 2020 Mejores Brokers de Forex 2019 – 2020 es el vídeo en el que se abarcarán temas de interés para las personas que comienzan... Si has oido hablar de FOREX o eres un PRINCIPIANTE, comienzo una serie de videos para que conozcais lo más básico. Si teneis cualquier duda me podéis contact...