FED Is Running Out Of Excuses On Interest Rates But Why Is The FED Easing Again

FED Is running out of excuses. Us economic data is showing strong job recovery. But FED is still ambivalent on increasing the interest rates. If you trade currencies like EUR/USD, GBP/USD, USD/JPY etc then you must keep an eye on the FED and what is is doing. Actions taken by FED can be felt in all the financial markets though. Whether it is the gold market, stock market or the bond market, you should be weary of FED and what is it does. Right now zero percent interest rates does not make any sense.

Over the past three months, businesses have added more than 1 million jobs, according to upwardly revised numbers from the Bureau of Labor Statistics. Though still anemic by historical standards—growth was close to 4 percent the last time the unemployment rate was this low, in mid-2008—wages rose month over month at a faster pace than anytime during the post-financial crisis recovery….The central bank has been holding its short-term interest rate target near zero for more than six years, with expectations that it will begin hiking rates, incrementally, later in the year.

Expectations are what the market work on. If the market thinks that FED is going to increase the interest rate that interest rate increase will get factored into the price before the actual rate increase. In the course of December and January, the balance sheet of the U.S. Federal Reserve (Fed) expanded by $186.7 billion to a total of $4.02 trillion. That policy reversal came after an impressive $244.6 billion liquidity withdrawal between August and November of last year. Interestingly, the Fed’s apparently puzzling return to aggressive asset purchases continued in an environment of mounting concerns about much-feared and presumably fast-approaching interest rate increases in the United States.

You should have a good knowledge of how the Federal Reserve System works. The day FED announces an interest rate increase you should expect a big spike in all the USD pairs. In case of EUR/USD, GBP/USD, the spike will be downward of course. Anything that strengthens USD drives these pairs down. In case of USD/JPY expect a spike of 300-500 pips up.

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