The recent improvement in the US Jobs Market has started the debate of increasing the interest rates sooner than expected amongst the FED Regional Bank Presidents. In June, most regional bank presidents weren’t seeing the interest rates increase coming until 2015. But the July US Jobs Data has been very good. In July the jobless rate fell to 6.1%. FED officials weren’t expecting the jobless rate to fall below 6.1% until the end of this year.Inflation can be a concern now. So FED might have to increase the interest rates sooner rather than later.
Now when it comes to increasing the interest rates, FED has a huge amount to take care of. It has got $2.6 trillion sitting as the bank reserves and $4.2 are being held by FED in various securities. As a currency trader, you need to master the art of fundamental analysis and know what the central banks are planning to do. Increase in interest rates is a big event for the currency markets. Whenever the interest rate increase is announced by the central bank, it moves the market the most.
In recent weeks, the Fed has neared consensus that its workhorse tool will be the interest it pays banks on excess reserves on deposit at the Fed – giving the central bank a direct way to encourage banks to either take money out of circulation and leave it at the Fed, or lend it elsewhere.
Another tool would have a similar impact but apply more broadly, using overnight repurchase agreements that would let money market funds and other institutions as well as banks essentially make short-term deposits at the Fed.
The worry is that if financial conditions tighten, those large funds of money would flee to the repo facility as a safe haven, depriving the economy of credit and making a potential crisis even worse.