Today the US Federal Reserve, in a totally predictable move if we all thought about it for 3 seconds, raised short term interest rates by 25 basis points. They also said that economic expansion in the United States appears to be solid, and that at the same time long term inflation worries are contained. However, they specifically pointed out that they are not necessarily done with rate hikes, and that energy prices could lead to inflation.
The fed funds rate now stands at 4.5%. It appears that it could get as high as 5.0% now.
The problem with the statement, for traders, is that the Fed is saying again that, “In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.”
What this means is that every major economic report (including this week’s ISM report tomorrow and the Non Farm Payroll report on Friday) are going to have a big effect on the USD. News will cause beastly movements in the major currencies against the USD. Especially economic reports that show actual numbers that are significantly different than the expected numbers. This causes lots of back and forth movement. This is frustrating for many of you who enjoyed trading in trends for the last 3 years.
During this time we need to be aware that the major currency pairs could trade in a range – all the way through March of this year. And it also means that the eyes of the world will be waiting to hear what the new Chairman of the Fed, Benjamin “Watch Me Single-Handedly Blow Up the U.S. Economy” Bernanke will have to say when he chairs his first meeting in March.
