Does the Fed control interest rates and US dollars?

Key Points

• The Fed sets the overnight funding rate at each of their ~10 meetings a year
• Short term yields are stalling as the overnight funding rate has stabilized around 5.5%
• Higher Treasury yields can cause US dollar to rise

What does the Fed control?

The Federal Open Market Committee, or the FOMC, typically meets eight to ten times a year to discuss economic conditions and take actions related to monetary policy if necessary. If they determine monetary policy should be tightened or loosened, the committee will alter the Fereral Funds rate - often referred to as the Overnight Rate.

This rate determines the cost to borrow and lend US dollars overnight, and is used by large banks holding funds with the Federal Reserve that wish to lend excess reserves to one another each night. The Fed expects the fluctuation of this rate to influence the behavior of US consumers and producers to maintain a steady rate of inflation (around 2%).

How are Treasury yields affected by the Fed?

Although the Fed doesn't directly control Treasury prices or yields, the Overnight Rate they set can substanitally guide prices. This relationship is greatest in the short term as 1-month Treasuries often closely follow the Fed Funds Rate. As the time horizon lengthens to 10 years, prices are still influenced by the Overnight Rate but also by longer term expectations and corresponding supply and demand.

The Fed's actions then trickle though the economy further since 10-year Treasury yields often influence commercial borrowing costs like mortgage rates and student loans.

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like IG. USD pairs can be found in IG's platform under the 'USD Pairs' pairs tab. Many traders also watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s Trading Academy. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

Interest rates impact forex markets because they determine the cost to hold or borrow currencies overnight. The differential between interest rates can cause greater demand for a certain currency over the other.