The interest rate on federal funds, also known as the “interest rate on EDF funds”, is the interest rate on loans between two depository institutions (US financial institutions) that use funds held by the Federal Reserve for overnight loans.
The level at which this rate is to be set is decided by the Federal Open Market Commission (FOMC), the main monetary policy institution of the Federal Reserve. Currency traders on luminablog.com pay special attention to it because rate changes can have dramatic effects on the valuation of currencies. When traders analyze other indicators, they do so to anticipate future interest rates, the decisive factor in setting currency prices.
Why are US interest rates soaring and rising?
Long-term interest rates in the United States are rising and are likely to continue to rise. In the last 2 months, the 10-year Treasury yield has doubled, from 1.38% to 2.94%. Why is this happening? About half of the 1.56 percentage point increase can be attributed to an increase in the real interest rate, measured by 10-year inflation-indexed treasury bonds, whose expected real yield rose from zero in July 2016 to 0.82 % today. The other half of the interest rate increase reflects the expected increase in the inflation rate from 1.38% to 2.12%. This is also seen with the help of reliable personal loans reviews in the US.
High and rising interest rates have major effects on the economy, especially on stock and house prices. As the extremely low-interest rates of the last twenty years have brought stock prices to record highs, moving to higher interest rates will slow down and depress stock prices. The level of real interest rates is particularly important for stock prices, as higher inflation increases nominal gains in such a way that the inflation component of higher interest rates is offset.
Understand the rise in long-term interest rates in the United States
Rising long-term interest rates in the United States have become the focus of global macro-financial concerns. The nominal yield of the Treasury at the 10-year benchmark has increased by about 70 basis points since the beginning of the year. In part, this is due to an improved economic outlook for the United States in a context of strong financial support and accelerated recovery from the COVID-19 crisis. So an increase could be expected. But other factors, such as investors’ concerns about the fiscal situation and uncertainty about the economic and political outlook, may also play a role and help explain the rapid growth earlier this year.
As US bonds are the basis for valuing fixed income and affect almost all equities in the world, a rapid and persistent rise in yields could lead to a reassessment of risk and a worsening of financial market conditions, triggering turmoil in emerging markets and disrupting the ongoing economic recovery. In this blog, we will focus on the key factors of Treasury yields to help policymakers and market participants assess the outlook for interest rates and the risks involved.