D-Day!

Today will arguably be the most anticipated Forex trading event of the year. It has been nine years since the last time the Fed rose interest rates and today’s FOMC meeting is the first of which there is a reasonable expectation of a hike by 25 basis points. You hear a lot of people talk about ‘the Fed raising interest rates’ but very few people really understand the actual process involved.

In a nutshell the FOMC regularly meets(I think every quarter) to decide the Federal Funds Rate, which is the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight. They announce their decision alongside a statement. The FOMC Statement is the primary tool the FOMC uses to communicate with investors about monetary policy.

The federal funds rate affects the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers. It also tends to affect the exchange rate. Generally speaking, if the Fed is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the USD.

After almost seven years of ZIRP (zero interest rate policy) the financial system as a whole has become used (and perhaps even addicted) to the Fed’s main method of stimulating economic growth. You are probably aware that I have always been rather skeptical about the actual benefit of ZIRP and if nothing else I have been very prolific about its moral hazard over the long term.

In any case, even if the Fed decides to raise to 0.25bps today – what does that really mean for us and for the U.S. economy? I mean, just ask yourself this: what type of economy jitters at the prospect of a 0.25bps FFR? The chart above shows you a bit of long term context, which is always a good starting point when faced with emotionally charged talking points. Yes, that’s right – back in the 1980s the FFR was actually set at nearly 20% – almost 100 times what’s making investors so nervous today.

As usual the real story here is to be found between the lines. Clearly banks and our financial system as a whole do no longer function the way they used to for much of our recorded history. The country your forefathers built over the past centuries (and particular during the 19th and 20th century) simply could not have been created on the basis of zero interest. The real implication of easy money and favorable terms for major financial institutions has been the polarization of wealth at the detriment of savers and an inflationary race to the bottom across all currencies. And a pump to 0.25bps is not going to change any of that, the long term damage has already been done and we as a people will have to live with the consequences of continually having chosen the easy road back in 2008.

From a trading perspective I’m in pretty good shape now as equities unexpectedly continued higher in yesterday’s session and the long positions I grabbed last Monday are solidly in the green now. I’m keeping my stop a bit above break/even near ES 1960 which should get me out without major damage should things fall off the plate today after 2:00pm and then again at 2:30pm when Yellen speaks.

AUD/NZD – the only setup I like today. I’ve had my eyes on this chart for a while now and I think this is a pretty good spot to get involved. Clearly we may see another FU stab lower to clear out some weak hands but the formation on the daily looks primed for a major stab to the upside.

Alright, that’s all for now – I’ll see you guys around 2:00pm.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,