Economical Uncertainty Could Shake Core Of Federal Reserve's Mandates

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With inflation mounting, unemployment soaring and spending down, InvestTechFX wonders if US Federal Reserve can meet the challenge of keeping inflation down while keeping citizens spending.

InvestTechFX the worldwide 1 pip fixed spread Forex broker notes that the primary tool for the US treasury to fight inflation, or help keep the economy out of recession, is through interest rates. Interest rates are the rate at which they allow banks to borrow money from them. Therefore, when interest rates are low, it is cheaper for banks to borrow money from the Federal Reserve, which means they will borrow more money which they can then loan out to the public and businesses. When inflation is high banks are less likely to borrow significant amounts of money, which keeps the economy in check as there is less cash flow entering the market. It is through these means that the Federal Reserve tries to control the ebb and flow of the national economy, making sure inflation does not get out of control while at the same time ensuring there is enough money to keep people spending, and in turn helps people keep their jobs.

InvestTechFX MetaTrader 4 Forex broker serving worldwide clients knows that the Federal Reserve was founded with the mandate to keep the USD valuable while simultaneously ensuring that their financial system remained healthy. Inflation is the primary threat to the first item. Inflation is the act of a dollar depreciating in value in the market. If something which cost $10 last year now costs $11 this means that inflation is increasing, as the dollar is now worth less than it was last year. When left unchecked, inflation can cripple an economy as the price of goods begins to go up, while people still have the same amount of money. In order to combat this, in a time of a strong economy the Federal Reserve will increase the interest rate which encourages banks to stop borrowing money. At this point, less new money is entering into the economy, which helps stop the rise of inflation.

InvestTechFX the leading 1 pip Forex Corp explained that the second half of the Federal Reserve’s mandate is keeping the financial system healthy, which means preventing the economy from entering into a recession. A recession happens for a variety of reasons, but the best way to combat it is to make people start spending money again. This is when the Federal Reserve will lower their interest rates, which make it cheaper for banks to borrow money. When banks have money, more money is entered into the economy which allows people to start spending their money again. When people are spending their money, businesses start to grow, which creates more jobs and helps the economy from falling into a recession. It is the job of the Federal Reserve to find balance between these two extremes, making sure people are spending money, but not too much to create inflation which devalues the USD.

InvestTechFX the no-commission Forex Corp offering 1 pip spreads notes why for an investor this is important information. First of all, monitoring changes in the interest rates of a nation are indicators of the state of its economy. Knowing the state of the economy is important to Forex brokers who need to know which currencies are likely to be strong in order to know what to invest in. Besides that, there is Treasury bonds which are issued as an investment tool by the United States treasury. Treasury bonds are essentially the US treasury taking a loan from the people in order to help remove the national debt. Treasury bonds are issued with varying degrees of length (called time to maturity) and also frequency of interest paid. Investors buy treasury bonds from the US treasury through auctions. Interest is paid on the loan by the treasury to the investor at the national interest rates. This makes treasury bonds more appealing during a time of high interest rates, which means they are more likely to be bought at better prices when the Federal Reserve has raised their interest rates.

InvestTechFX, worldwide leader with 1 pip spreads over six majors has noticed that at times of low interest rates, interest on treasury bonds draws smaller yields, as they pay less through interest (though the yield at maturity is still the same sum). This means that they are less desirable when the interest rates are low and increasing, and therefore are bought and sold at discount rates, so that the actual return on investment will be the same.

When trading Forex through platforms such as InvestTechFX’s MetaTrader 4 platform, it is important to watch things such as inflation and interest rates as they do have a direct effect on Forex trading, as well as on commodity trading. Interest rates effect currencies being held in the Forex market. An investor needs to know what the interest rates are for currencies they are trading, therefore, as they need to know what sort of interest rates are being applied to the money in their trades. Commodities are more directly associated with inflation, because inflation means that the buying value of currency is decreasing, this means that commodities will become more expensive comparatively as a result. Due to the permanent nature of precious metals, along with their intrinsic value, they become an effective hedge against inflation.

InvestTechFX worldwide 1 pip Forex corp. believe that careful observation of treasury bonds, inflation rates and interest rates, a trader can have a better idea of the current state of the economy. With this knowledge, combined with InvestTechFX MetaTrader 4 platform, it is possible that a trader could make informed judgments on the state of the market and make large gains as a result.

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