Forex Investment and Currency Trading

The Fed has slashed its target for the fed funds rate to a range of 0.00-0.25%, and has begun to shift its focus towards quantitative easing measures and other unorthodox techniques. The latest cut essentially serves to reunite the target for the fed funds rate with where the effective fed funds rate has been operating over the span of the past several months. And with the fed funds rate now essentially as low as it can go, it is only natural that the Fed has begun to pursue other means of adding stimulus to the economy. The Fed now talks [...]

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If risk conditions eventually normalize and the USD is no longer the beneficiary of short term inward financial flows, a key uncertainty is the medium term impact of the US policy mix – estimated new Treasury issuance of about $1.3 trn in fiscal 2009 (excluding additional borrowing associated with new fiscal stimulus measures likely early in the year) combined with monetary easing – on the fate of the USD.
While the implementation of so called “quantitative easing” by the Fed - starting in mid-September but made more explicit by the Fed in mid-December – may have initially hurt the USD, the [...]

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Quantitative easing involves purchasing securities and expanding the central bank’s balance sheet in order to increase the money stock, a distinct departure from the Federal Reserve’s normal operating procedure of targeting interest rates. This is a first for the Fed: it’s a response to the threat of sustained contraction in aggregate demand and the seeming lack of effectiveness of lower interest rates as they approach zero.
Normally, the Fed announces a Federal funds rate target, and through open market operations (purchases and sales of short-term Treasury securities), it adjusts reserves so that the effective Fed funds rate is aligned with the [...]

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For the Fed, core inflation heading to zero is a green light for as much quantitative easing as it wants, at least while the economy is still weak. Eventually the Fed may have to face an issue that Japan has struggled with in recent years – what to do with the inflation target? Unlike other countries, the Fed does not have a formal target but it has made it clear in recent years that it wants core inflation to be in the 1-2% range. Indeed this has become a standard view for most central banks – much above 2% and [...]

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