Categories
Forex Economic Indicators

The Secret Politics of the Dollar: Federal Reserve Vs. White House

The Strange Relationship Between the Federal Reserve and the White House has shown once again that silence is gold and the word is silver. Unlike Donald Trump, who the more he talks, the less people trust him, confidence in the Fed’s president has grown to its peak since 2004, when Alan Greenspan was in charge.

A whopping 58% of Gallup respondents believe Jerome Powell will do something that will benefit the economy. Interestingly, the lowest rating was that of Janet Yellen, who just took over as director of the central bank in 2014. And I understand that: the inner world of men is more complex, while that of women is more unpredictable.

Donald Trump has changed a lot as he rules the country. Previously, he actively criticized the Fed president for the extremely high-interest rates, compared to other states, or for the unwillingness to revive QE. Like a true friend, he whispered in Powell’s ear: write, call, when you have money, visit me!

– Mr. President, judging by your statements, you understand that true friends do not grow on trees.

– You never know.

Admittedly, Jerome Powell gave the White House owner everything he could. And the federal funding rate dropped to almost zero, and he promised to buy unlimited amounts of treasury bonds and mortgages. No one is calling the Fed any other way than “good crazy” and “runner under the rake” these days. There is no reason for criticism, so it is time to turn to other problems and scapegoats. For example, negative oil prices or China.

Donald Trump previously stated that low energy prices were a blessing for the U.S. economy. But not so low!

– How much is the oil?

– It is free!

– Why so expensive?!

Amid the sharp collapse of oil demand and social isolation, record oil production in the United States led to storage shortages, falling oil prices to -37 USD per barrel, and an intention to end the quarantine. Get Grandpa out of the bunker, it’s time to fill him with oil!

The president of the United States cannot sleep well, thinking that China will stop the recession faster. He used to attack Beijing because his predecessors turned a blind eye to China’s dishonest trade. Now is the time to try to figure out who is responsible for the pandemic. The virus came from Asia, and Donald Trump is trying to make everyone understand what the Great Wall of China was built for. Apparently, there have been unpleasant precedents.

Trump has radically changed his views. The best example is his new attitude toward the US dollar. He used to say that a strong currency is bad, now he thinks the opposite… I would say that the strong position of the dollar makes “everyone want to invest in our country” because “people are looking for security in our country”. At the same time, new loans are hardly difficult, as debt-servicing costs are low. Despite all these changes, Trump remains active. So we can’t say that people are washing their hands during the pandemic while Trump is washing his hands of the pandemic.

Categories
Forex Market Analysis

US Dollar Index Consolidates Expecting Further Declines

Overview

The U.S. Dollar Index (DXY) develops a mid-term sideways formation inside a long-term bearish trend that looks incomplete. During this year, the Greenback sheds -4.31% (YTD). Although the positive inflation data expanded the price in Tuesday’s trading session, it was not enough to boost the price toward fresh highs.

Market Sentiment Overview

The U.S. Dollar Index (DXY) retreats 0.23% in Wednesday’s trading session by erasing the advance that the Greenback made on Tuesday, driven by inflation data, which exceeded surveyed analysts’ expectations reaching 1.4% (YoY).

Although the data released by the U.S. Bureau of Labor Statistics this Tuesday exceeded the expectations of market participants and Federal Reserve policymakers boosting the price to climb 0.53%, the reading observed would not have a greater impact on the rate decision of the next FOMC broad meeting. Still, it would be more focused on the evolution of the labor market.

The following chart illustrates the U.S. Dollar Index in its 12-hour timeframe. The figure exposes the 90-days high and low range, reflecting that the market participants’ sentiment remains on the extreme bearish side. The price action remains below the 200-period weighted moving average, confirming the bearish sentiment.

On the other hand, the last Commitment of Traders Report unveils institutional traders’ bearish bias, confirming the bearish sentiment exhibited by the U.S. Dollar Index.

Therefore, according to the Federal Reserve policymakers’ expectations, the labor market’s evolution could be a factor contributing to the U.S. Dollar Index volatility increase. On the other hand, as long as the price remains below 94.02 pts and below the 200-period average, the Greenback bias will remain on the extreme bearish side.

Technical Analysis Outlook

The U.S. Dollar Index, in its 4-hour chart, illustrates a sideways movement from a long-term bearish sequence, which seems to be incomplete. The mid-term sideways structure is limited by September 01st low of 91.75 pts, with a top of the sideways range at the level reached on September 25th, located at 94.74 pts.

The above figure shows that the mid-term trading range moves between 91.75 pts and 94.82 pts. This market context suggests that the currencies included in the U.S. Dollar Index basket might continue developing sideways movements in the coming trading sessions.

On the other hand, the Elliott Wave perspective overview reveals that the price developed a three-wave bullish movement from the September 01st low of 91.75 pts, which ended on 94.74 pts.

Currently, the DXY index develops a pause formation in a bearish sequence that could evolve in three waves. This consolidation structure identified as wave ((b)) in black is still in progress.

Accordingly, the U.S. Dollar Index should complete the consolidation movement identified by the short-term sideways channel before continuing with its mid-term bearish trend.

Categories
Crypto Daily Topic

Why the United States Senate is Mulling over Digitizing the Dollar

About two years ago, the concept of central bank digital currencies (CBDCs), particularly in the United States, seemed far away in the future. Sure, there have been several studies exploring the implementation and use cases of CBDCs, but to the average person, the concept was still unclear. Fast forward two years, the Senate Banking Committee tabled a bill known as “Banking For all Act” that seeks to digitize the U.S.U.S. dollar. 

Led by Senator Sherrod Brown, the bill came at the height of a global pandemic – the Coronavirus outbreak – which has prompted the U.S.U.S. government to offer taxpayers a stimulus check to help them weather the economic recession caused by the epidemic. In a press release, Senator Brown laid out the details of this bill by saying that if implemented, the legislation would allow Americans to access their stimulus funds without relying on expensive check cashers. Unfortunately, the proposed legislation didn’t make the final draft of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As a result, the distribution of the first $1200 stimulus check was riddled with issuance glitches since the existing infrastructure doesn’t support the nationwide disbursement of funds. In fact, it is reported that more than 35 million Americans are yet to receive their first stimulus check. 

The digital dollar debate Gets a second chance.

Under the current system, Americans have to wait for direct cash deposits or physical checks from the U.S. Treasury Department. As such, those without a bank account filed with the Internet Revenue Service (IRS) cannot receive the stimulus check. At the same time, with respect to the spread of Coronavirus, physical cash/checks can increase the spread of the disease, countering the government’s efforts of flattening the curve. This created a new momentum for the reintroduction of the digital dollar proposal as an efficient way of distributing funds. 

Building on this momentum, congresswomen Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) introduced a proposal to have the federal government issue a $2,000 stimulus check through the Automatic BOOST to Communities Act (ABC Act). Under this act, Congress will authorize the Federal Reserve to create ‘FedsAccounts,’ which are, basically, digital dollar account wallets. This way, U.S. residents and businesses will be able to access funds through an app on their phone. 

Following up on ABC Act, the Senate Banking Committee recently held a virtual meeting to discuss the digitization of the dollar, chaired by Senator Mike Crapo. In attendance were four ‘witnesses,’ among them being the former chairman of the U.S. Commodity Futures Trading Commission (CFTC), Christopher Giancarlo. He is also the brainchild of a non-profit think tank known as the Digital Dollar Foundation (DDF), which seeks to advance the cause of government-issued digital currency. Recently, the foundation partnered with Accenture – a global leader in CBDC advancement – to form the Digital Dollar Project. Under this merger, a whitepaper was released explaining a “Champion Model” for what should be the essential technical designs of a digital dollar. 

The Champion Model 

As outlined in the whitepaper, the digital dollar doesn’t seek to replace its fiat counterpart, but rather act as a third form of the national currency. As such, the Federal Reserve will maintain its control over the monetary policy and distribution of the digital dollar. 

The only difference between the proposed digital dollar and the fiat currency is that the former will be distributed in the form of tokens instead of an account-based model used by the latter. Through tokenization, all transactions will be managed by a digital ledger that records and authenticates digital dollar tokens to ensure that they are genuine and not double spent. 

To kick-start, the distribution of the digital dollar, commercial banks, and payment processors will exchange their fiat currency reserves for digital dollars, and subsequently distribute them to customers via apps or debit cards. 

Pros and cons of a digital dollar 

The main advantage of a federal issued digital dollar is that it will enhance financial inclusion. This is especially important with the ongoing issuance of stimulus checks whereby the unbanked population missed out on the first disbursement due to a lack of access to financial services. Even for the banked population, the current payment processors are inherently slow and costly to send money. However, the blockchain architecture supporting the digital dollar can facilitate efficient transactions at a more affordable rate than the existing infrastructure. 

Besides the advantages, there are various concerns about the use of tokenized dollars. Most of these concerns are centered around the privacy and centralization of users’ data. The CBDC will be issued by the Federal Reserve, meaning that the government will gain absolute control of users’ financial data. Also, with the government’s reputation for running mass surveillance programs, the incoming digital dollar may be a new system of monitoring the masses. 

Beyond payments

The digital dollar proposal is yet to get a green light from Congress. But, having sparked the attention of legislators, it conveys an overwhelming sense of urgency that the government should work on a CBDC sooner than later. Moreover, the Digital Dollar Project whitepaper emphasizes the need for digitizing the dollar by laying out that other national governments have already started pilot programs for their native CBDC. 

China, in particular, is testing its native digital currency, which will be included in payment systems of various multinational companies such as Starbucks and McDonald. Of particular concern is China’s potential to push its digital Yuan in emerging markets and international trade. If successful, the digital Yuan has the potential to unseat the U.S. dollar as the ideal reserve currency. 

Facebook’s plan to launch its digital currency – Libra – has also had a hand in spiking the government’s interest in designing a digital dollar. Even more recently, the Libra association modified its whitepaper to include a series of fiat-pegged stablecoins rather than just one multi-currency backed token as initially planned. 

Conclusion 

It remains unclear how soon the digital dollar will come into existence. However, given the economic pressure from the Coronavirus outbreak as well as competition from China’s digital Yuan, the digital dollar debate will continue to linger in the minds of policymakers for long. Ultimately, it is great to see legislative attention on digitizing the dollar using blockchain technology, as this promotes the acceptance of cryptocurrencies. 

Categories
Forex Fundamental Analysis

Everything About ‘Gold Reserves’ & It’s Impact On The Forex Market

Introduction

Gold is one of the most precious metals on the planet. In the field of monetary assets and currencies, Gold is like a nuclear warhead among all weapons. Throughout history, this yellow metal has always held its place as a secure financial investment. For a certain period in the international markets, it backed the major currencies like the United States Dollar.

Even though today’s currencies are no longer backed by any metal and are free-floating fiat currencies, countries still own and purchase gold year after year in tons. This shows that it is still one of the important financial assets of many countries. Change in Gold Reserves will have an impact on the nation’s currencies. Hence the study of the same is important for fundamental analysis for traders and investors.

What are Gold Reserves?

Most of the major nations which participate in international trades through export or import maintain a certain proportion of foreign currencies to hedge their currency at times of hyperinflation or deflation to manage their exchange rate at a fixed level, thereby not incurring losses on exports or imports.

Similarly, Many countries’ Central Banks maintain specific metric tons of Gold as reserves in their nation’s vaults along with other assets. Gold deposits saved in the nation’s vaults or other nation’s vaults as their holdings are called Gold Reserves.

Why Gold Reserves?

Up until a few decades ago, the Gold was used to back up the legal tenders of many countries. Today’s world is run by Fiat currencies, which can be printed as much as required by a government as the United States did before the Vietnam war, which led to the crashing of Bretton wood’s agreement. If, in a hypothetical case, let us say the United States dollar is no longer accepted as a legal tender in the global market, then the United States cannot buy or sell goods and services using their currency. Still, they can sell their Gold in exchange for the same.

The exposure of a currency to the market trends volatility, economic crisis makes it an unsafe form of wealth, which can depreciate over time. In this regard, Gold has always proven that it can hold its ground even during a major economic crisis and continue to appreciate to match with the inflationary trends. At times of economic crisis, extreme inflation, or deflation, which results in currency depreciation of a nation, investors, and people, in general, tend to run towards Gold as a safe financial bet.

Economic Reports

The International Monetary Fund (IMF) tracks and keeps the statistics of all assets of a nation as reported by various countries, which are then used by the World Gold Council (WGC), who are responsible for keeping up the demand and supply for Gold in the global market.

The data is obtained from the Central Bank’s Balance Sheets and compiled by WGC and releases monthly. They also provide historical data about the same for various countries to compare and analyze side by side.

How can the Gold Reserves numbers used for analysis?

Gold is not an abundant metal on the planet, and its rarity, along with unique lustrous yellow radiant color and other physical properties, has always kept it in demand in the market of jewelry, trades, and particular instrument designing sectors.

Gold is seen as one of the standard forms of wealth to be passed on from one generation to another, meaning its value keeps rising with global economic growth. As economies become wealthier, the Gold price also tends to be costlier. The worth of Gold in that sense has always remained constant, i.e., a precious and expensive metal.

The Gold demand increases during times of high inflation, and because of the limited supply, the price of Gold increases against the currencies. In this sense, the countries which are a net exporter of Gold see their domestic currency worth appreciating. Countries that are importers of Gold see their currency worth falling against Gold. In this aspect, Gold is indeed still a form of currency, or we can say it is an alternate form of currency.

Nations purchase Gold from the Bullions market and store up just like an ordinary employee saves up money for future needs or as an emergency fund for a rainy day.  Major Nations increase their Gold Reserves in hundreds of tons per year as it preserves wealth better than most currencies, and also for their concern on long term economic health and growth of their nation.

Below is Gold Reserves numbers for prominent countries having high holdings.

Above image is taken from the World Gold Council Official Website

Impact on Currency

A country with no Gold Reserves is exposed to all the risks associated with Fiat Currencies. Throughout history, there have been many currency crises where the dips have been so low that markets crashed, and governments collapsed, for instance, the Black Wednesday, which pushed the Sterling pound out of European Exchange Rate Mechanism.

Countries having substantial Gold Reserves numbers can face economic crises without market crashes, and the system collapses. As at any time, they can sell their Gold Reserves to increase their Currency worth, and let it float back again in the market against other fiat currencies.

Investors who have invested in foreign companies in that nation’s domestic currency can eliminate the fear of his returns depreciating over time or during economic crises there if the nation has sufficient Gold Reserves. Traders who Carry Trade can also be sure of their deposits not being subjected to major shocks that lead to unexpected volatility in the short run as the country will be able to recover from this through their reserves.

Gold Reserves inherently indicate a nation’s capacity to bounce back from a crisis or to never go into one in the first place. This is the reason why the United States Dollar and Euros are one of the major pairs as their Gold Reserves are in the top five amongst the world due to which the volatility in the currency is so low, making it a safe bet to trade on.

Low Gold Reserves can lose the confidence of investors, which would further depreciate the value of an already weakening currency, thereby pushing the economy further down the drain of a crisis. In Conclusion, the higher the Gold Reserves, the lesser the volatility and vice versa.

Sources of Gold Reserves Index

We can monitor the Gold Reserves changes of various nations across the globe from the WGC monthly reports, and they can be found here. Global Reserves data of different countries can also be found here. You can also go through Gold Reserves of the Federal Reserve Banks of the United States history here. We can derive the same numbers from the Central Bank’s balance sheets or the National Bureau of Economic Research.

Impact of the ‘Gold Reserves’ news release on the price chart 

Gold reserves play a major role in maintaining the economic stability of a country, and thus the government tries to own a lot of Gold. Some of the main uses of Gold include hedging against inflation and determining the value of import and export. The Gold Reserve of the country is released on a quarterly and monthly basis that shows the transactions carried out by different nations. Since the Gold Reserves held by a country is an important economic indicator, it said to have a moderate to high impact on the value of a currency.

The above image shows the previous and latest Gold Reserve data of India, which is published on the 1st of every month. A higher reading than before is considered to be bullish for the currency while a lower reading is taken to be bearish. India’s Gold Reserves was reported at 28.997 USD bn in Jan 2020. This shows an increase from the previous number of 27.831 USD bn for Dec 2019. The Reserve Bank of India is the official organization that provides Gold Reserves in USD.

EUR/INR | Before The Announcement

The first pair with which we will start our discussion is EUR/INR, where the above image shows a ‘daily’ time frame chart of the same. We see that the market is in a range from more than three months and currently seems like it has broken out of the range. Since we don’t have any clue of the Gold Reserves data, we cannot take a position on any side of the market. Technically, we have broken above the range, and we need a suitable retracement to join the trend.

EUR/INR | After The Announcement

As the data is released and the market gets to know that the Gold Reserves were increased than before, we see a sudden drop in prices as a result of strength in Indian Rupee. But later, the price reverses sharply, making the candle to close in green. One of the reasons could be that since the market was in a strong uptrend, it tried to make its last move up and finally collapsed later.

The volatility is seen to increase on both sides. From a ‘trade’ perspective, here’s where the technical analysis should be combined with fundamental analysis. We cannot take a short trade until the price crosses below the moving average, which is a sign of reversal.

GBP/INR | Before The Announcement

 

GBP/INR | After The Announcement

The above images represent the GBP/INR currency pair where we witness an extremely weak Indian Rupee, and just before the announcement, price is at the recent ‘higher high,’ which means this is the point from where the market fell. Without guessing what the Gold Reserve data might be, it is wise to wait for the news announcement and then take suitable action. However, one can still trade in ‘options’ to take advantage of high volatility when the announcement is being made.

After the news release, we see that the market drops, and the candle closes in red, which means there are high chances that traders may see the data as positive for the Indian economy and hence buy INR. Thus, as soon as the price falls below the moving average, we can go ‘short’ in the pair with a conservative target. Also, the price is in an area that could be a possible resistance.

USD/INR | Before The Announcement

USD/INR | After The Announcement

In the USD/INR currency pair, before the news announcement, the market moves up after reacting from the ‘support’ area and currently is in the middle of the range. Again, we don’t find any way to trade this pair as a news announcement can cause sudden volatility on any side. The overall volatility also appears to be low in this currency pair.

After the announcement is made, we see that the price drops below as a result of an increase in Gold Reserves from the previous month. The sudden increase in volatility on the downside, making the price go below the moving average, may attract one to go ‘short’ in the pair. We can sell the currency pair, but the stop loss needs to be placed above the resistance. The risk to reward ratio of this type of trade would be around 1:1.

That’s everything about Gold Reserves and the impact of its new release on the Forex price charts. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Understanding ‘Interest Rate’ & It’s Impact On Various Currency Pairs

Introduction

Economic indicators measure how strong the economy of a country is. They `can measure specific sectors of the economy, such as housing or manufacturing sector, or they give measurements of the country as a whole, such as GDP or Unemployment. The following article will explain one such crucial economic indicator that drives the value of the currency – Interest Rate.

What is Interest Rate?

The interest rate is a fee we are supposed to pay for the money we borrow from the bank. It is generally expressed in terms of a percentage on the principal amount borrowed. The Bank’s primary source of income comes from the difference in the interest rate they charge to the borrowers and the lenders. They operate and profit from the difference between these rates.

When interest rates are high in a country, banks find it difficult to pass on such rates to consumers as it corresponds to fewer loans and more savings. This reduces spending in people, which will have an impact on the economy. Also, raising the interest rates curbs inflation and thus improves the economy.

Types of Interest Rates

The interest rate is frequently used by money managers while making investment decisions, and they look at different types of rates. The different kinds of Rates are Nominal, Real, and Effective interest rates. These are classified on the basis of critical economic factors that can help investors become smarter consumers and better investors. Let’s understand each of these types below.

Nominal Interest Rate

Nominal Interest Rate is the rate that is stated on a loan or bond. It signifies the actual price which the borrowers need to pay lenders in order to use their money. For example, if the nominal rate on loan is 10%, borrowers can expect to pay $10 of interest for every $100 they borrow from the lenders. This is referred to as the coupon rate because it used to be stamped on coupons that were redeemed by bondholders.

Real Interest Rate

It is named this way because, unlike the Nominal Interest Rate, it considers Inflation to give investors an appropriate measure of the consumer’s buying power. If an annually compounding bond gives an 8% Nominal yield and the inflation rate is 4%, the real rate of interest is only 4%. This can be put in the form of an equation as:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

There are other pieces of information that the above formula provides in addition to the Real Rate. Borrowers and investors make use of this info to make informed financial decisions. They are:

  • When the Inflation Rates are negative, Real Rates exceed Nominal Rates, and the opposite is true when Inflation Rates are favorable.
  • There is one theory that suggests that Inflation Rate moves alongside the Nominal Interest Rate over time. Therefore, investors who have a long time horizon will be able to get investment returns on an Inflation-adjusted basis.
Effective Interest Rate

This type of Interest Rate takes the concept of compounding into account that the investors and borrowers need to be aware of. Let us understand how Effective Interest rate works with an example. If a bond pays 8% annually and compounds semi-annually, an investor who invests $1000 in this bond will receive $40 of interest payments for the first six months and $41.6 of interest for the next six months. In total, the investor gets $81.6 for the year. In this example, the Nominal Rate is 8%, and the Effective Interest Rate is 8.16%.

Economic reports & Frequency of the release 

Federal Open Market Committee (FOMC) members vote on where to set the Target Interest Rate. Later, they release the reports on the same with the actual rate and analysis. The policies of Central Banks also have an impact on the Interest Rates of a country. The Reserve Bank members hold meetings eight times a year and once every six weeks to evaluate the Interest Rates. These economic reports are published on a monthly and quarterly basis, and investors can compare the previous Interest Rates to Current Rates and analyze how they changed over time.

Impact on Currency

Investors are always interested in countries that have the highest Interest Rate, and they are more likely to invest in that economy. The demand for local currency is expected to increase, which leads to an increase in value.

High-Interest Rate means residents of that country get a higher rate of return on the deposit they made in banks and on capital investments. So obviously, investors will invest their capital in countries where they get a higher rate of return for holding their money.

Under normal economic circumstances, when investments increase in a country, the value of the currency appreciates and thus attracting the traders across the world.

Sources of information on Interest Rate

The Interest Rate data of some of the major economies can be found in the below references. The Rates of the respective countries are also available on the Reserve Bank website. However, the FOMC makes an annual report on the Interest rate that can be found here.

Authentic Sources To Find The Info On Interest Rates 

GBP – https://tradingeconomics.com/united-kingdom/interest-rate

AUD – https://tradingeconomics.com/australia/interest-rate

USD – https://tradingeconomics.com/united-states/interest-rate

CHF – https://tradingeconomics.com/switzerland/interest-rate

EUR – https://tradingeconomics.com/euro-area/interest-rate

CAD – https://tradingeconomics.com/canada/interest-rate

NZD – https://tradingeconomics.com/new-zealand/interest-rate

JPY – https://tradingeconomics.com/japan/interest-rate  

Interest Rate is one of the crucial factors that impact the currency of a country. It is especially crucial for traders who prefer taking trades on Fundamental analysis. But it is advised not to trade just based on this fundamental indicator alone. It is always better to combine the fundamental factors with proper technical analysis to get an edge over the market.

How ‘Interest Rate’ News Release Affects The Price Charts?

It is important to understand how the new releases of macroeconomic indicators like interest rates have an impact on the price charts. Below, we have provided some of the examples to demonstrate the impact of Interest Rates news release on various Forex markets. There is a reliable forum where all the government news release date is published, and it is known as Forex Factory.  Here, we can find all the present and historical information regarding most of the fundamental indicators like GDP, Interest Rates, Inflation Rate, etc.

Below we can see a snapshot taken from the Forex Factory website. FOMC (Federal Open Market Committee) is a branch of the Federal Reserve Board that releases the Interest Rate data according to the predetermined frequency. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

Below, we can see the latest figures for Interest Rate data released by FOMC. We can see that the rate hasn’t changed from the previous release (both Actual and Previous being 1.75%)

 

Now, let’s see how this news release made an impact on the Forex price charts.

USD/JPY | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM) 

From the above chart, it is clear that before the news releases, the market was in a consolidation state (observe the last few candles.) Most of the Fundamental traders and investors must be waiting for the latest Interest Rate numbers. We have also plotted an MA on the chart to identify the market direction, and we can see the MA also being flat before the news release.

USD/JPY | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

Right after the release, we can observe a Bullish candle, which shows the initial reaction to the Interest Rate. It seemed to be positive for the US dollar, but later the market collapsed. The Interest Rates remained unchanged and were maintained the same as before, which should be positive for the US dollar. Hence, we see that initial reaction.

But why did the market collapse after a few minutes? This is because the market was expecting a rise in the interest rates, but FOMC kept a neutral stance and did not raise the rates. This explains the reason why the market fell after the announcement. The MA, too, does not rise exponentially, which shows the weakness of the buyers.

Since the market moved quite violently, later, the news release could prove to be profitable for the option traders who did not have any directional bias. There will be many traders who would want to take advantage of the market volatility right after the news release. So, even before the news is out, they employ various options strategies and make a profit. This requires a high amount of experience and knowledge of options and is not recommended for beginners. Now, let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

USD/CAD | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

USD/CAD | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

From the above charts, it is clear that the USD/CAD pair shows similar characteristics as that of our USD/JPY example. The last few candles before the news release portray a bit of consolidation prior to the news release, followed by a spike during the news announcement and then finally a collapse. One can take short trade in this pair and make a profit on the downside. Make sure to combine this with technical analysis for extra confirmation.

 AUD/USD | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

AUD/USD | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

Since the US dollar is on the right side in this pair, ideally, we should see a bullish momentum after the news release. We can see that right after the release, the market prints a spike on the downside and forms a ‘hanging man’ pattern, which could be a sign of trend reversal. It can be clearly observed that the news had a significant impact on this pair as it reversed the trend almost completely.

Bottom Line

All we wanted to say is that the major Fundamental Indicators do have a significant impact on the price charts. At times we can see that these news releases can increase the market volatility significantly and even change the direction of the underlying trend. When we combine these Fundamental Factors with the Technical Analysis, we will be able to predict the market accurately and take trades with at most accuracy. Cheers!

We hope you find this article informative. If you have any questions, let us know in the comments below. Cheers!

Categories
Crypto Guides

Do Cryptocurrencies Have The Potential To Be An Alternative Financial System?

Introduction

Bitcoin, the first cryptocurrency, bought a notion of decentralization in the market. Initially, it had a slow start, but later as the public began to understand the working of decentralized markets & the interest towards cryptos has increased. Its been ten years since Bitcoin’s inception, and currently, close to five thousand cryptocurrencies are existing in the market. The total market capitalization of all the cryptocurrencies combined is close to $195 Billion as of Dec 2019. The 24-hour transaction volume is around $78 Billion.

This kind of volume is enormous, but it can nowhere be compared to the gazillion amounts transaction volume that takes place in the Forex market. So it is safe to say there is a lot more that cryptos have to do to compete with the current financial system directly. But that doesn’t mean they don’t have the potential to do so. Hence, in this article, let’s discuss the pros of the decentralized financial system of cryptos and the cons of centralized current financial systems.

A bright future ahead?

Cryptocurrencies have features which prove to the extent that they do have room for being replaced with fiat currencies. The most crucial point of consideration is that cryptos cannot be quite easy as the fiat currencies, thanks to their decentralized and unregulated status. The technology that makes this possible is the blockchain network.

Moreover, cryptocurrencies could support the concept of universal basic income much better than the fiat currencies. In fact, some programs have already set an example by using cryptocurrencies as a means of distributing a universal basic income. Furthermore, cryptocurrencies could remove the existence of intermediaries in everyday transactions. This would eventually cut costs for businesses and help out the consumers.

Advantages Of Decentralized Financial Systems

✔️ Fraud prevention

Cryptocurrencies are powered by blockchain, which is an open-source ledger. Every single is recorded and recorded and verified through a consensus algorithm, so it is almost impossible to tamper with any transactions. This indeed is an enormous benefit of the decentralized financial system.

✔️ Shielded from government meddling

Decentralized financial systems, such as the cryptocurrencies, are not controlled by the government, central bank, or any other government body. This is a great advantage because when government meddles with currencies, it creates inflations or hyperinflation by devaluing, debasing, or printing too much currency in a short period of time.

✔️ Faster transactions

Decentralized-based cryptocurrency transactions are often much, much faster than the bank transactions. For bank wire transfers, the transaction time is around two days. But, in the case of cryptocurrencies transfers, it takes not more than a few minutes.

Disadvantages Of Centralized Financial System

❌ Regulations & Transaction Cost

There are limitations placed on how much of funds one can withdraw in a day & in a month. For instance, in the US, $2000 is the maximum withdrawal limit, and in some banks, it is less than $500. But when it comes to cryptos, it doesn’t matter. One can transfer any amount of funds without having to worry about the limits. Also, when it comes to the transaction cost, crypto transactions are way too cheaper than the typical bank fee.

❌ Payment Delays & Human Errors

Bank wire transfers typically take 1-5 days for the transactions to get processed. It also depends on various factors like the place from where you are sending money to. This is because each of the countries will have their own banks and hence different regulations. But cryptocurrencies do not have geographical boundaries like this. Transactions get executed almost immediately irrespective of where you live. Also, there is a possibility of the occurrence of minute errors as there is human involvement. But in the case of cryptos, users just have to copy-paste the corresponding address to perform their transactions. By doing this, there is very little chance of the occurrence of human errors.

Final Conclusion

The answer to the question ‘Do Cryptocurrencies Have The Potential To Be An Alternative Financial System?’ is NO as of today. But they do have the potential to be so. As of today, central banks are extremely powerful, and they can not be replaced with the current technology. One thing that we are sure about is that the cryptos have made an impact, and they have grabbed the attention of most of the central banks. We have also seen some of the central banks adopting blockchain technology to issue their own coins. So the most plausible prediction is that cryptocurrencies may play an active, supportive role in making the traditional banking processes extra cheaper, more transparent, and faster.

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Crypto Guides

What Should You Know About Ripple? The Most Centralized Cryptocurrency!

Introduction 

In our previous articles, we have seen that Bitcoin has inspired and paved the way for a multitude of new and affordable platforms using cryptocurrencies. Ripple is one such platform developed by Ripple Lab’s incorporation, a US-based company in 2012. It is a payment platform built upon a distributed open-source protocol. This best part about this cryptocurrency is that it is backed by major Banking and financial institutions. They use Ripple for transferring money, commodities, cryptocurrencies, or any other units of value like flier miles or free mobile minutes.

Objective

The Objective of Ripple is to rule over all the international transactions worldwide. They have come up with this objective as the cost of international transactions is too high if we transact using traditional means. It also takes days to settle the transaction. The most innovative idea behind this platform is that we can use the network to transfer any currency, not only cryptocurrency, to be more specific. Thus, making the platform currency independent. Ripple Network, also knows as RippleNet, enables many banks and financial institutions to send and receive money smoothly throughout the world.

How is Ripple different from other cryptocurrencies?

In the world of blockchain, the upcoming networks or platforms are trying to eradicate the existing systems. Ripple is doing precisely the opposite. Instead of trying to remove them, this technology is trying to cooperate with them to make them better. Several products by Ripple Labs (XCurremt, XVia, and XRapid) are being used by several banks to perform transactions globally. The native cryptocurrency of the platform XRP plays an essential role in the system.

Let us see how the transactions are performed globally using Ripple technology. The currency which is being transacted is converted into XRP before the transaction. As the recipient receives the money, the user will have an option to convert the XRP into his/her desired currency. Thus, XRP plays a bridge between two different currencies in this case. The transaction fees for this transaction is as less as $0.00001. This transaction fee disappears from the network after the transaction is processed.

Market Capitalization 

Ripple’s XRP is in third place in terms of market capitalization amongst Cryptocurrencies. Currently, this crypto is trading at $0.295, while the total market cap is around 12 billion dollars. The 24-hour trading volume is $1,729,560,739. The maximum number of coins the XRP ever can have is 100,000,000,000, while 43,242,653,330 out of them are already in circulation (43.2%).

Pros and Cons of Ripple

We have already seen that many banks have trust in Ripple technology and started using this network. By using this technology, some world-renowned banks claim that they are potentially saving 70% of the transaction costs annually. Since all the coins are minted already, inflation i.e., the value of Ripple, remains stable over the period.

Ripple is highly centralized, unlike other cryptocurrencies. 61% of the coins minted are in control of the founders of the Ripple Labs. They decide when and how much of the coins are released. Hence centralization is the major con. In May 2018, Ripple was accused of alleged cheating through its ICO.

Conclusion

Since 2013, many traditional platforms that serve international transactions have adopted Ripple as an alternative remittance option to its customers. By December 2014, Ripple combined its services with Earhports payments systems, making it the first-ever partnership of Ripple with a giant payments network. Western Union, American Express, and Unicredit are some of the largest customers of this technology, making the technology achieve its goal closer every passing day.

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Forex Educational Library

Minutes of the Federal Reserve June – December 2017

The minutes of the Federal Reserve are written records that register the details of the Federal Open Market Committee (FOMC) meetings. Comments are recorded in these minutes about the main variables of the US economy by analysts, presidents of federal banks, among other agents. The summary of these minutes is published after the meetings held by the federal reserve and is of great importance for economic analysts and investors.

The importance of the minutes is that they provide additional details to those presented in other reports issued by the central bank itself, so they can be used to see how the voting was in the meetings within the committee members, what are the concerns of the members of the economy and how are the economic projections for the current year and the following ones. In the minutes there are figures on the projections and the state of the economy so for investors it is important when the minutes are released to the public.

In the minutes of June, the administrator of the System Open Market Account (SOMA) reported that so far, this year the price of shares had continued its upward trend as at the end of 2016 and market volatility remained low. Some surveys conducted by SOMA to the market showed that expectations in May were for an increase in the federal funds rate in June as well as the normalisation plan in the Federal Reserve balance sheet.

To reduce the balance sheet the committee intended to gradually reduce the holdings values by decreasing its reinvestment of the principal payments received from securities held in the System Open Market Account. With the gradual reduction of holdings in securities, the offer of balances of the reserve will also be reduced which is in line with the discourse of the FED, which has anticipated for some time that it would reduce the balance sheets through time. The committee did not rule out softening the normalisation in the balance sheet if the economy showed worrying signs outside the projections estimated in previous meetings.

The information reviewed in the meeting that took place between December 13 and 14 showed that labour market conditions continued to strengthen and there is evidence to suggest that the real gross domestic product (GDP) accelerated in the second quarter of 2017. Personal consumption expenditures (PCE) decelerated in the month of April. The total inflation and the rate of inflation that excludes the prices of food and energy were below 2%, a reason why concern in the committee was generated because it was not fulfilling its objective number, although the expectations continued pointing to this figure at the end of the year.

Total nonfarm employment expanded further between April and May and the average pace of job gains during the first five months of 2017 was solid. The unemployment rate decreased to 4.3% in May. Total industrial production increased sharply in April reflecting gains in manufacturing, mining and utilities in production processes. One of the sectors that showed negative trends was the production of vehicles at the beginning of the year, but modest gains were achieved in the recent period.

Real PCE grew strongly in April after modest growth in the first quarter. Better gains in jobs, higher real personal disposable income and higher household wealth were determining factors for the real PCE to grow solidly due to improvements in consumer demand. Some surveys conducted by the University of Michigan showed a feeling of optimism in consumers.

Residential investment showed a slowdown in the second quarter due to the fact that in the first quarter, this form of investment showed very solid results. This could have been due to a response to the expectations of increases in the interest rate, which would make it more expensive to borrow from the banks.

Real private expenditures for commercial equipment and intellectual property showed positive figures, although not in the same magnitude as the first quarter of 2017. In general, the surveys showed optimism on the part of investors and businessmen so the operations in oil and gas continued to increase in the second quarter.

The United States’ nominal trade deficit widened slightly in March with a small reduction in exports and a small increase in imports. Net exports grew slightly in the first quarter of the year, which contributed to the gross domestic product, but not to a large extent.

With the 12-month period ending in May, the Consumer Price index (CPI) grew a little less than 2% while the core inflation CPI was 1.75%, and in general, the surveys made to analysts showed that expectations have not varied with respect to inflation in the long term, so it is expected that the objective of the Federal Reserve will be fulfilled.

In the press releases issued by the FOMC between inter-session periods, analysts have been in line with their expectations because the elimination of the accommodative policy has been emphasised gradually. Market participants interpreted the FOMC statements as indicating that the economic projections had not changed at all in 2017. In the US, projections prepared by the FOMC members it was observed that the projections of the real gross domestic product remained stable due to a solid path of the economy in the first half of the year, especially during the second quarter thanks especially to the increase in the aggregate spending of the economy.

Due to the strengthening of the labour market in the first half of 2017, the FOMC expected the unemployment rate to continue to decrease slightly in the rest of the year and until 2019, showing figures below the long-term rate.

There was also a change in the inflation projections (PCE), which revised the figures downwards due to the fact that during the first half of the year the price behaviour was weaker than expected, but they expected transitory shocks that were affecting prices and in the following years the objective of the Federal Reserve of 2% will be achieved. Many analysts agreed that the softening of inflation was due to decreases in the prices of mobile telephony and prescription drugs, but there is no long-term determinant that has managed to change the expectations of agents in the market.

After evaluating economic conditions, the labour market and inflation, all FOMC members decided to raise the target rate of federal funds to 1.25%. It was noted by the committee that the monetary policy continues to be accommodative to encourage economic activity in the remainder of the year, so the balance sheet of the bank still did not show major changes. Those who voted to make an increase in the interest rate of the reserve were Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, and Jerome H. Powell.

The only president who voted against was Neel Kashkari who is the president of the Minneapolis Federal Reserve Bank. Mr Kashkari preferred to leave the interest rate unchanged due to doubts he had about meeting the 2% inflation target and to wait for additional evidence to show that the effects on inflation were transitory in order to raise rates.

In the September meeting of the Federal Reserve, there were reports which showed the continuation of the positive trend of the labour market of the United States. The growth of the gross domestic product was moderate, but it was still following the positive trend that it had during the whole of 2017, despite natural disasters such as hurricanes Harvey and Irma. Although for this meeting there was no total evidence of the effects of the hurricanes on the economy, there were indications that showed negative effects on production and positive effects on inflation, but it was estimated that these effects would be short-term without affecting the path to the economy in the following years.

Annual CPE inflation continued its trend below 2% in July and showed lower figures than at the beginning of the year. Despite this, market surveys still expected that in the following years, inflation would be close to meeting the goal of the Federal Reserve.

Total nonfarm payroll employment grew solidly between July and August with good wage increases and the unemployment rate remained low at 4.4% at the end of August. Unemployment claims increased from historic lows due to the consequences left by hurricanes in multiple communities in the United States. Total industrial production increased for the sixth consecutive month in July, but in August there was a strong change in trend, showing the temporary effects of hurricanes, especially in drilling and oil and gas extraction activities and manufacturing companies located on the coast.

In the automotive industry, there were still many inventories but there were indications that production had picked up in recent months. On the other hand, despite that, another effect of the hurricanes was the reduction in consumer spending, in the reports presented in September it was observed that the consumption of people continued to drive the real growth of the PCE, which is why the shocks of natural disasters did not alter the positive trend of the PCE.

It was also evident that the investment in real estate decreased in the third quarter, showing the continuation of the negative trend of the second quarter as well as the construction of new housing. New and used home sales showed negative figures during the third quarter. On the other hand, private spending on business and intellectual property increased strongly during the third quarter of 2017.

In terms of inflation, the PCE measured annually grew close to 1.5% with the 12-month period ending in July, but these figures accelerated in August closing close to 2%. The retail prices of gasoline increased drastically due to the ravages left by Hurricane Harvey on drilling platforms, which was one of the main components that drove inflation measurements. Market analysts interpreted the FOMC releases between meeting periods as indicative of a slower path in increases in the interest rate of federal funds than was expected due to weak inflation behaviour.

In the report issued by the FOMC, it was stated that during the third quarter of 2017 a decrease in the growth of real gross domestic product was expected due to the multiple hurricanes that hit the United States, but expecting a strong rebound of production during the fourth quarter due to the return to production of sectors and districts that were affected by natural disasters.

The committee projected some changes in core inflation and in PCE due to the effects that hurricanes generated in fuel prices, although in the long term no changes were made to price projections.

In summary, the members of the meeting observed a labour market that continued to strengthen, a real GDP that grew at moderate rates due to natural disasters and a low unemployment rate. The presidents of the federal banks indicated that in each of their districts the economic activity was expanding to moderate figures before the arrival of the hurricanes. Although industrial production fell in the areas affected by the storms, some Presidents of other regions reported solid gains in manufacturing during the month of August and July. The analysts in the committee of the districts affected by the hurricanes reported that their projections on the affectations would be of short-term waiting for a positive fourth quarter. This was due to good levels of expected consumption expenditure in addition to investment in businesses, which would compensate for the industrial decrease generated by the storms.

World economic conditions were improving in 2017 in addition to the depreciation in the third quarter of the dollar, so in the fourth quarter, it was expected to contribute to domestic production. The majority of participants in the meeting did not take into account, within their projections, the possible tax cuts that President Donald Trump was trying to implement, or their possible impact on the US economy.

Many of the participants in the meeting expressed concern about the readings of low inflation, so they began to doubt whether the effects that kept inflation low were transitory or if on the contrary, they could persist in time which would affect the long-term projections, and the monetary policy stipulated at the beginning of the year.

After evaluating economic conditions, the labour market and inflation in September, the committee decided to keep the interest rate unchanged at 1.25%. The state of the monetary policy was left in an accommodative state, waiting for a greater strengthening of the variables, especially inflation, which was the variable that most worried about its behaviour. It was also established that the normalisation program of the Federal Reserve balance sheet would begin in October.

Those who voted in favour of the two decisions were Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell.

In the last meeting of December of the Federal Reserve, it was observed in the reports compiled by the different committees that the prices of the shares continued to increase their value, thanks in part in the fourth quarter to the tax reform passed in the Congress. On the other hand, the labour market continued to strengthen due to higher jobs created and an improvement in the wages of workers due to the narrow labour market.

As for real gross domestic product, a positive trend was also observed in the second half of 2017. Personal Consumer Expenditures (PCE) measured annually fell below 2% in October and was lower than in 2016. Total Nonfarm payroll employment increased in October and November showing a rebound in payrolls from the months of July and September where there were several hurricanes that affected economic activity.

The national unemployment rate went down to 4.1% in October and November and remained at that level showing the positive behaviour of the labour market, and in general for all ethnic groups and classes of people, unemployment rates similar to those observed before the 2008 crisis.

Total industrial production rose sharply in October, partially boosted by the return to operation of multiple industries in the districts affected by the storms, which is a sample of the successful analysis of the Federal Reserve that indicated that the hurricanes would only have consequences in the temporary economy. The real PCE modestly increased in October after rebounding strongly in September. As in the previous reports, consumption expenditure encouraged by better earnings in salaries, real personal disposable income and net household wealth, helped the real PCE to increase as in the second and third quarters. The consumer sentiment measured in various surveys showed the optimism that persisted in the market.

A variable that began to strongly rebound was real residential investment in the fourth quarter after having performed poorly in the previous two quarters. A similar behaviour occurred in the construction of residential housing and the sale of new and used homes. Real private spending on business equipment and intellectual property continued to increase during the fourth quarter.

The economic projections made by the FOMC committee showed results similar to those presented in the previous reports. It was observed that the real GDP had grown solidly in the first semester of 2017 and in the second semester similar figures were expected. Although the hurricane affected economic activity, employment and inflation, in the months after the second quarter it was observed that there were no drastic changes in the projections of these variables.

The committee expected that the positive trend in consumer spending would continue thanks to the strengthening of the labour market, improvements in household wealth and a feeling of optimism among consumers. Even they also expected that the cuts in taxes on people would further incentivise consumer spending, but also other analysts agreed that the effect of the tax reform was discounted a few months ago, so the consumption had grown thinking that the reform would be tested without complications.

They also commented on the possible effect that the tax reform would have on capital spending since there was no clarity about the true impulse to the accumulation of capital by companies with this tariff reduction. This is due to the fact that in several surveys several companies said they were cautious in the purchase of new capital because the possible saving in the cash of the companies would go to purchase new companies or mergers with the existing ones, payment of debt or repurchase of Actions.

Also in some districts in the surveys, the businessmen showed concern about the narrowing of the labour market because it has not been easy to find qualified workers, which made it difficult to respond to the demands of the consumers or to expand the operation of their businesses. The PCE in October was 1.6% so analysts continued to worry about being below the goal of the Federal Reserve, but some analysts also observed that core inflation was stabilising over time and showing some positive trends in the fourth quarter of 2017. Although problems such as technological innovation or globalisation continue to arise, they could drag down the price index as there is more competition in business.

Some participants in the meeting were not in favour of raising the interest rate target due to the weak performance of the economy which, according to them, could change market expectations even in the long term, so they preferred to wait to see the total inflation of the market.

After evaluating the economic conditions until November, labour market and inflation, the majority of committee members voted in favour of raising the interest rate to 1.5% noting that monetary policy remained accommodative to continue supporting the behaviour of the labour market and economic growth. Those who voted in favour of this action were: Janet L. Yellen, William C. Dudley, Lael Brainard, Patrick Harker, Robert S. Kaplan, Jerome H. Powell, and Randal K. Quarles.

The two votes against were Charles L. Evans, president of the Chicago bank and Neel Kashkari, president of the Federal Bank of Minneapolis. Both wanted to keep rates at the 1.25% level at the December meeting as inflation remained below the 2% target, as it did for most of 2017, and according to them not for temporary issues. According to Mr Kashkari, the labour market was still strong creating new jobs, but the growth of real wages did not have such positive behaviour, so this ended up affecting the inflation figure. He was also concerned about the flattening of the yield curve which indicated that the long-term expectations of inflation were falling in the market consensus. For Kashkari, it was better to wait for inflation to reach the target figure or even go above 2% in order to raise the target of the interest rate.

In conclusion, the minutes are able to find much deeper comments not only from the members of the FOMC committee but also from other bank entities and comments on surveys conducted in the market. 2017 showed, in general, a strong labour market in terms of job creation and wages, although wages did not show the same strength as the rate of job creation. The economy performed well despite major natural disasters such as Hurricane Harvey, and these natural disasters helped inflation to accelerate mainly due to higher fuel prices which helped inflation to be close to the target figure. Throughout the year there were three rate increases added to normalisation in the balance sheet of the bank, but there were some votes against in the meetings of the reserve because inflation did not show the expected signals at the beginning of 2017.

©Forex.Academy

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Forex Educational Library

Components of the Federal Reserve

To understand how each meeting of the Federal Open Market Committee (FOMC) is conducted and who is in charge of monetary policy we should understand how the Federal Reserve is composed, who are its members and how they are elected. In addition, we should know what the tasks are of each entity of the reserve to determine how they will act in the meetings they have throughout the year. The Federal Reserve is not like other central banks as there is some independence between the banks in each district, so it is important to understand how the bank is made up.

The Federal Reserve System is the central bank of the United States. It develops five main functions to promote the efficient operation of the economy of the United States and thus achieve a better welfare of the public in general. The five main functions are:

Control the monetary policy of the country: The objective of the monetary policy is to promote maximum employment, stable prices and moderate interest rates in the United States economy.

Promote the stability of the financial system: It seeks to minimise and contain systematic risk through the activity of monitoring local and foreign financial activity.

Promote the safety and soundness of individual financial institutions: Monitor the activity of each bank individually to analyse its impact on the banking system as a whole.

Promote the security and efficiency of the payment and settlement system: Through services to the banking industry and the US government that facilitate transactions and payments in US dollars.

Promote consumer protection and community development: Through consumer-centred monitoring and review, research and analysis of emerging consumer issues and trends, community economic development activities and administration of consumer laws and regulations.

The structure of the central bank is decentralised so the Federal Reserve is divided into 12 districts. The boundaries of each district were based on the commercial regions that existed in 1913 and other economic variables, so each district of the central bank does not necessarily coincide with the geographical lines of each state. In addition, each district is identified by a number, which makes it easier to identify which district is being analysed in the bank’s reports. In the following graph, you can see the 12 districts of the banks of the reserve.

Graph 43. Federal Reserve Banks. Retrieved 13th January 2017, from https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

 

The twelve districts of the Federal Reserve operate independently, but under the supervision of the board of governors of the reserve. In principle, it was determined that each district will work independently and make its monetary policy decisions separately, but when the national economy became more complex and more integrated, the districts had to cooperate more with each other and coordinate their policies. In 1935 the Federal Open Market Committee (FOMC) was created, showing a unification of the concepts of each district.

In the mid-1980s, the Federal Reserve centralised and consolidated its financial services as well as creating support channels between the different districts. Reserve banks have become more efficient through the conclusion of service agreements within the system that assign responsibilities for services and functions of national scope between each of the 12 banks.

The drafters of the Federal Reserve Act initially rejected the concept of a single central bank. Instead, a bank was formulated with a system of three fundamental pillars. First, a board of governors of the central bank that would have the task of supervising the work of others. Second, a decentralised structure in its operation of 12 banks in the reserve. And third, a combination of public and private characteristics in its management. Although some central bank entities share characteristics with private sector entities, the Federal Reserve was established to serve public interests. In the following graphs, you can see the composition of the Federal Reserve and its main tasks (graph 44), and how the Federal Reserve was organised (graph 45).

Graph 44. Purposes and Functions. Retrieved 13th January 2017, from https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

Graph 45. Purposes and Functions. Retrieved 13th January 2017, from https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

In summary, there are three key entities in the Federal Reserve system:

  • The Board of Governors of the reserve.
  • The Federal Open Market Committee (FOMC).
  • The Federal Reserve banks.

 

The board of governors is a federal government agency that reports directly to the Congress, provides general guidance to the system and oversees the 12 reserve banks.

Within the system, there are certain responsibilities that are shared between the Board of Governors in Washington D.C. (whose members are set by the president with the consent of the Senate) and the banks and branches the federal reserve. While the Federal Reserve has frequent communication with the executive branch and congressional officials, its decisions are made independently.

In addition to these key parts in the Federal Reserve, there are two other significant entities that contribute to the functions of the reserve.

  • Depository Institutions (banks, credit unions and savings banks): Depository Institutions offer transaction and check accounts to the public, and they can maintain their own accounts in their local Federal Reserve banks. The depository institutions must comply with the reservation requirements, that is, keep a certain amount of cash, either in cash or in an account in a Reserve Bank based on the total balances in the current accounts they hold.
  • Advisory Committees of the Federal Reserve System: They make recommendations to the Board of Governors and reserve banks depending on the functions of each one. There are four advisory councils that assist and advise the board on public policy issues.

The Federal Reserve has its own advisory committees that help in making decisions, but one of the most important committees is the one that advises them on issues of agriculture, small businesses and labour market issues. The board of governors requests committee reports twice a year to assess the state of the economy and national sectors.

As mentioned in the introduction, the goal of the Board of Governors, federal banks and the FOMC is to work together to promote the health of the United States economy and price stability, coupled with the stability of the national financial system.

The way the Federal Reserve works is as follows. The Board of Governors, located in Washington D.C., is the governing body of the federal reserve system. It is made up of seven members who are nominated by the President of the United States and are confirmed in their positions by the Senate. The board guides the operation of the federal reserve system to promote the objectives and complete the responsibilities given to the reserve system.

All board members serve on the FOMC, which is the body within the Federal Reserve that establishes monetary policy. Each member of the Board of Governors is appointed for a period of 14 years; the terms are staggered so that a term expires on January 31 of each even year. After completing a full 14-year term, a Board member cannot be reappointed. The president and vice president of the Board are also appointed by the United States President and confirmed by the Senate, but they only serve for a term of four years, although they can be re-elected for another four years.

Nominees for these positions must already be members of the Board or must be appointed simultaneously to the Board. The Board oversees the operations of the 12 reserve banks and shares with them the responsibility of supervising and regulating certain institutions and financial activities.

The board also provides general guidance, direction and supervision when reserve banks provide loans to deposit institutions, and when reserve banks provide financial services to depository institutions and the federal government. As part of the surveillance, the Board evaluates and approves the budgets of each reserve bank. It also ensures that the concerns of consumers are heard by the central bank to respond to their needs.

The 12 central banks and their 24 branches are the operating arms of the Federal Reserve System. Each reserve bank operates within its particular geographic area or district. Each reserve bank collects data and other information about the business and the needs of the community in each district. Then that information is compiled by the FOMC so that the Board acts based on these studies.

The Federal Open Market Committee (FOMC) is the part of the federal reserve that is responsible for setting the national monetary policy. The FOMC makes decisions regarding open market operations that affect the interest rate of federal funds (the interest rates at which financial institutions lend to each other), the size and composition of the assets held by the reserve and communications with the public about the future course of monetary policy.

The FOMC consists of 12 voting members (7 members of the board of governors, the president of the New York Federal Reserve and 4 of the remaining 11 district presidents who rotate in this position annually.) All 12 presidents of the Banks in the districts attend the meetings they have with the FOMC and participate in the discussion about the state of the economy and what steps to follow, but only the presidents who are members of the committee at the time of the meeting can vote in Monetary Policy Decisions. By law, the FOMC determines its own internal organisation and by tradition, the FOMC elects the president of the Board of Governors as its president and the president of the New York Federal Reserve bank as its vice president.

FOMC meetings are usually held eight times a year in Washington D.C. and other times as necessary. This committee is in charge of supervising the open market operations, which are the main tools of the Federal Reserve to execute the monetary policy of the United States.

The monetary policy of the Federal Reserve is the set of actions taken by the central bank to achieve three specific objectives:

  • Maximum employment.
  • Stable price levels.
  • Stable and moderate interest rates in the long term.

The Federal Reserve conducts the national monetary policy by controlling the interest rate in the short term of the economy and by influencing the availability and cost of credits in the economy. Since monetary policy directly affects interest rates, there is an indirect effect on the prices of the goods of the economy, on the wealth of people and on the exchange rates with respect to other currencies. Through these channels, monetary policy influences the level of spending of the economy, investment, production, the level of employment and inflation in the United States.

An effective monetary policy complements the government’s fiscal policy to sustain economic growth in both the short and long term. Although the objectives of the bank with regard to the monetary policy have not changed, it has changed the form and the tools to control the variables of interest. The Federal Reserve was created by Congress in 1913 to provide the nation with more security, flexibility and a more stable financial system.

In the minutes signed in the creation of the Federal Reserve, it was established that the Board of Governors and the FOMC should conduct monetary policy to promote its three main objectives. In this mandate that was given to the federal reserve, the objectives will be considered fulfilled when the majority of people who are looking for work are successful in their search, and when the prices of goods and services on average are relatively stable.

The importance of stable prices for the economy is given because when there is stability in this variable, there is a stable growth in the long term of the economy, the level of employability is higher and more stable and helps the bank’s third objective since with stable inflation and within certain ranges, the interest rate in the long term will be moderate and in line with the expectations of the agents in the economy. In addition, they generate stability in the wealth of the population so stable prices over time will help improve the quality of life of American citizens.

Stable prices will also encourage savings and capital formation since when there is a low risk that inflation is outside of its target ranges, the risk of erosion in the value of assets is reduced, which is very evident when there is high inflation. For example, if a consumer wants to buy a machine for his factory and there is very high inflation, in the future, that acquired asset will lose its value which will also affect the confidence of people, who could postpone their consumption and investment decisions.

One of the objectives of the Federal Reserve that on some occasions has not been achieved is to control and promote the stability of the financial system by reviewing and regulating financial institutions and their activities. A financial system is considered stable when all institutions of the system such as banks, savings banks and cooperatives can provide resources to households, businesses and the community in general, to invest and participate actively in the economy which will generate long-term growth term.

The resources and services that a stable financial system should have are lines of credit for business, loans to students, savings accounts, retirement accounts among others. That is, there is an effective connection between lenders and borrowers where both parties are benefited by certain returns of their money and in other cases by the money supply that cannot be obtained otherwise. A healthy system must face low transaction costs that do not affect the distribution of resources because if the costs of lending are very high, the function of banks will not be fulfilled and there will be no relationship between people with money to invest and those who do not. They have the necessary resources.

With the task of the Federal Reserve to monitor the health of the financial system, it is supposed that there should be some regulations for banks to be able to face adverse conditions in times of crisis or possible bank runs that would affect the liquidity of banks. Monitoring risk through the financial system is the task of the Federal Reserve and other regulatory entities which should ensure that banks do not take excessive risks which have sometimes failed since private banks manage to bypass those regulations.

In conclusion, the federal reserve is a system composed of three key entities such as the board of governors, the banks of the 12 districts and the FOMC. Each of these entities has its own responsibilities, but they are under the authority of the Board of Governors. Within the board members, there are some members who are chosen by the president of the republic and confirmed by the Senate. The Federal Reserve is responsible for maintaining the good performance of the economy with stable price variables that allow interest rates without greater volatility. It is also a mandate of the reserve to monitor the financial system of the United States, but private banks have managed to bypass these regulations. For investor decision-making, it is important to analyse in each meeting who are the presidents of the banks with votes and the situation in their district to project what will be the decision of each one regarding monetary policy.