FX Trader's Basic Course for "Adult Economics"｜Episode 3: The Basics of Interest Rates - Part 2 [Koichiro Amamiya]
This企画 allows you to learn fundamentals (analysis) systematically. As with the previous edition, in this edition we have Koichiro Amaya again explaining clearly about "The Basics of Interest Rates." Many traders likely think they understand interest rates that have a close relationship with the foreign exchange market. Let’s learn properly here and equip ourselves with solid knowledge.
Table of Contents for the 3rd Session
1. Market interest rates and policy rates
2. What is the official discount rate?
3. Short-term vs. long-term interest rates
4. You can foresee future interest rate movements by looking at the yield curve
5. Steepening and flattening
6. U.S. Treasuries yield curve
7. Expected inflation rate = BEI
8. Inflation era and deflation era
9. Summary of the 3rd session
※This article is a republished and edited version of an article from FX攻略.com August 2017
Koichiro Amaya (Amaya Kōichirō) Profile
For over 20 years, he has held key foreign exchange positions at major foreign banks such as UBS, JP Morgan, and BNP Paribas. He has a history of ranking highly in the Tokyo foreign exchange market dealer rankings in the financial specialist magazine "Euromoney." In 2006, he became a freelance financial analyst and provides FX market information to FX companies and portal sites from his sharp, independent perspective.
twitter：https://twitter.com/geh02066
Market Interest Rates and Policy Rates
The interest rate mentioned last time is the rate determined by economic conditions such as the business cycle and inflation rate, credit risk, and supply-demand factors. Since this is a market-determined rate, it is referred to as “market interest rates.”
In contrast, the rate determined by the central bank as part of monetary policy is called the “policy rate.” Central banks typically raise rates (monetary tightening) when they want to restrain the economy and lower rates (monetary easing) when they want to stimulate the economy. You can also think of this as substituting “the economy” with “price increases” (inflation).
Central banks adjust monetary conditions (i.e., open market operations, injecting funds into the market or absorbing them) to bring market interest rates closer to the policy rate. They can also influence market psychology and price formation of rates through the “announcement effect” when they declare a policy rate change.
Policy rates are often used as targets for short-term interest rate guidance, and in the United States they target the federal funds rate, while in Japan they target unsecured overnight call rate in the interbank market.
In the FX market, U.S. interest rate trends are the most watched, and the market continually monitors what the U.S. Federal Reserve will do next. If you understand how the Fed evaluates the current economy and how it intends to conduct monetary policy going forward, you can better forecast interest rate trends and, by extension, the currency market.
