The Fed is looking for new instruments to control rates. Fundamental analysis for 21.05.2014
21.05.2014
If the Fed's exit from the third round of quantitative easing is more or less clear, because the regulator is clearly aimed at the completion of the program in the fall, the prospects of higher interest rates remain hazy. Moreover, in an environment where the financial system is pumped with significant amounts of liquidity, monetary authorities have to develop new mechanisms to control rates.
In other words, it is now not as important, when the Fed will begin to raise interest rates, but how it will be done. It is possible that some light will be shed on these questions with the publication of the minutes of the April meeting of the FOMC, which will be released on Wednesday night. At the heart of the current system is the mechanism for mutual crediting of banks at the expense of reserves, placed in the Fed deposits.
These loans are tied to the key rate of the regulator, which is usually the focus of most of the attention. This rate has a full name – the federal funds rate. This rate is called the primary rate, because the rates for almost all types of loans directly depend on it - mortgages, credit cards, corporate loans, consumer loans and some other credit products.
Previously, only when the Fed began the first round of quantitative easing, it was assumed that before the rate increases, the extra liquidity will be ejected out of the system, but the volumes were so significant that it will now prove to be very difficult. It is possible that the controller can strengthen the role of the deposit rate, but it will not help to influence the cash flow passing through the short-term stock market, bypassing the Fed.
This is why the Fed continues to experiment with the so-called "reverse repos", doing transactions with non-bank financial organizations. In general, both of these instruments can compete with the key rate in its classical sense, but there are some risks - the volume of trading in the federal funds market can significantly sag, and the lion's share of short-term loans can go to badly regulated monetary funds instead of banks.
The weak data on the Payments balance of the euro zone allowed the Eurodollar to resume its decline. Whether the bears will keep this pace will directly depend on the publication of the minutes of the Fed. Since the market may "swing", I trade with extreme caution. However, if the expected protocols will not contain anything revolutionary, there is a high probability that the market will continue on the downward trajectory.
RoboForex Analytical Department
In other words, it is now not as important, when the Fed will begin to raise interest rates, but how it will be done. It is possible that some light will be shed on these questions with the publication of the minutes of the April meeting of the FOMC, which will be released on Wednesday night. At the heart of the current system is the mechanism for mutual crediting of banks at the expense of reserves, placed in the Fed deposits.
These loans are tied to the key rate of the regulator, which is usually the focus of most of the attention. This rate has a full name – the federal funds rate. This rate is called the primary rate, because the rates for almost all types of loans directly depend on it - mortgages, credit cards, corporate loans, consumer loans and some other credit products.
Previously, only when the Fed began the first round of quantitative easing, it was assumed that before the rate increases, the extra liquidity will be ejected out of the system, but the volumes were so significant that it will now prove to be very difficult. It is possible that the controller can strengthen the role of the deposit rate, but it will not help to influence the cash flow passing through the short-term stock market, bypassing the Fed.
This is why the Fed continues to experiment with the so-called "reverse repos", doing transactions with non-bank financial organizations. In general, both of these instruments can compete with the key rate in its classical sense, but there are some risks - the volume of trading in the federal funds market can significantly sag, and the lion's share of short-term loans can go to badly regulated monetary funds instead of banks.
The weak data on the Payments balance of the euro zone allowed the Eurodollar to resume its decline. Whether the bears will keep this pace will directly depend on the publication of the minutes of the Fed. Since the market may "swing", I trade with extreme caution. However, if the expected protocols will not contain anything revolutionary, there is a high probability that the market will continue on the downward trajectory.
RoboForex Analytical Department
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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex bears no responsibility for trading results based on trading recommendations described in these analytical reviews.