Every six weeks we get the Federal Open Market Committee which sets the Federal Funds Rate as a branch of the Federal Reserve of the United States. The Federal Funds Rate or FFR for short is the interest rate which banks charge each other to issue loans between banks. The rate historically has been kept above 1 percent and is not really a big problem unless there is a banking issue like the recession in the U.S.

The reason we keep a close eye on the federal funds rate is because that is what makes banks want to lend or not lend. A low rate will encourage banks to lend to each other and a high rate will discourage since they will have to pay higher interest. This is the only real power the Federal Reserve has to motivate banks to lend or not to lend, which really isn’t a very powerful tool and has many limitations.

The one reason this is very important is that this shows how the Federal Reserve feels about the economy and if they lower the Federal Funds Rate it shows the Federal Reserve has issues with the economy and does not feel like banks can stop lending. This always is one of the most influential indicators for trading and normally affect trading largely. So keep a close eye on the Federal Funds Rate, it can be your friend and can also be your worse enemy if it catches you off guard.

Good luck to everyone on their trades and remember trade smart and not with your emotions.

Gus Forex

Gustavo Feliciano is the owner and webmaster of GusForex.com a blog and news feed about the Foreign Exchange Markets with current market analysis and trading strategies.

You can follow Gustavo Feliciano at:

http://gusforex.com/

http://twitter.com/gusforex