Educational Guide

Interest Rates & Trading

Interest rates are the most powerful tool central banks use to control economies. For traders, rate decisions and expectations drive major moves across all asset classes - from forex to bonds to equities.

How Rates Affect Currencies

Higher interest rates attract foreign capital seeking better yields, strengthening the currency. The interest rate differential between two countries is a key driver of forex pair movements. Carry trades exploit these differentials.

Trading Rate Decisions

Market moves depend on expectations vs actual decision. A 25bp hike when 50bp was expected is dovish. Watch: rate decision, statement language, press conference tone, and updated economic projections (dot plots for Fed).

Rate Expectations & Yield Curves

Markets price future rate expectations into bond yields. The yield curve (2Y vs 10Y spread) signals economic outlook. Inverted curves historically predict recessions. Fed funds futures show probability-weighted rate expectations.

Frequently Asked Questions

How do I trade Fed announcements?

Wait for the initial volatility to settle (2-5 minutes), then trade the sustained direction. Focus on whether the Fed is more hawkish or dovish than expected, not just the rate decision itself.

What is the neutral interest rate?

The neutral rate (r-star) is the theoretical rate that neither stimulates nor restricts economic growth. Central banks aim to be above neutral to cool inflation, below neutral to stimulate growth.