Forex Blog: Currency Trading News & Analysis.

March 8th 2005

Fed telegraphs rate hikes

Led by Alan Greenspan, the Federal Reserve has raised interest rates 6 times since the year 2000, when rates stood at an all-time low. Each time it has raised rates, the Fed has been abundantly clear in signaling future hikes. A common misconception is that the Federal Reserve actually determines the federal funds rate (ffr), from which all other important interest rates derive. In actuality, the Fed merely sets a ‘target’ for the ffr. Alan Greenspan has a great deal of credibility among investors and creditors; thus, the actual ffr is usually quick to converge to the target he sets.

This can have the unintended consequence of depressing risk premiums, which are usually tacked on to the ffr to account for general economic and monetary uncertainty. The result is below average treasury and corporate bond yields (which are derived from the ffr). It is any body’s guess as to the whether Greenspan and the current administration are deliberately pursuing a weak dollar policy. One thing is for sure: if Greenspan continues to telegraph future interest rate movements, bond yields will remain comparatively low. And that spells trouble for the Dollar. 

Read More: A new communication strategy to raise real yields?

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Posted by Adam Kritzer | in Central Banks | No Comments »

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