The basic FED rate is the federal fund rate, which is the interest rate at which banks allocate their surplus funds, remaining on Federal Reserve accounts,to other banks on the overnight credit terms.
FRS controls the federal funds interest rates level by means of government bonds operations.
The interest rate development decision is taken by the Financial Markets committee, which is the FRS member. Based on this decision ,other commercial banks fix their loans and deposits interest rates. High rates decrease the consumer lending rates growth and stimulate savings rate growth thus slowing down economic development. The rates growth usually leads to the increased capital inflow and national currency rise in a medium-term plan. However if the rates growth is not based on the fast economic development it can lead to stagnation and negative influence on the currency markets in the long-term plan.
Besides the bank rate decision, the Open Markets Committee meetings also approve non-traditional measures of monetary policy. For instance, currently Federal Reserve provides “twist” operations in the course of American economy stimulation (securities portfolio correction) ; Federal Reserve previously held the quantitative easing program (buying of financial assets for” injecting” a certain amount of money into economy). Along with the decision regarding the interest rate, the Open Markets Committee also publishes an accompanying statement. This statement presents the current economic situation analyses as well as economic growth forecast evaluation.
Effect of market
The market reaction towards the discount rate is one of the strongest. Increase in the bank rate or any of its future signalsprovide strong support to the Dollar.