The principle of setting interest rates, information you ought to know about foreign exchange

How exactly are interest rates set? A question that worries many market participants. This is understandable, because the rates determine the amount of payments made every month. The rate is also positioned as a payment to the creditor (in exchange for money for a loan).

The main principle of setting rates is the direct dependence: the larger the amount of the loan, the correspondingly higher the risks of the lender, and, therefore, the rate increases.

Of course, for a complete mechanism, there are a number of nuances. To better understand the essence of this process, consider the principle of setting interest rates in the US (for housing loans, California).

So, there are three main factors affecting the formation of rates in the US:

1) The Federal Reserve System - the Federal Reserve System;

2) Securities market - bonds;

3) Economic factors that affect the installation process.

The FRS is a system organization that includes 12 regional Fed banks in the state. The reserve is trying to conduct its activities and monetary policy, having directed all efforts to fight inflation. Members of the board of the system not only meet regularly 8 times a year, and constantly change interest rates during the meetings. The board of the FRS includes 12 members of the board that regulate the rates, based on changes in the bank's loan performance.

What is their impact on rates?

The Fed makes loans and issues loans to banks that are part of the Federal Reserve Bank.

The system charges the bank, which takes the loan, interest. These percentages are called the "discount rate".

The bank or lender offers funds to borrowers, but on condition that the initial interest rate is charged from it.

The higher the discount rate, the one that the Fed sets the bank, the greater the interest rate for the customer: the bank should not work at a loss.

Interest rates also depend on the various loan programs that are offered to the borrower.

As for the bond market, it is in dynamics: daily fluctuations occur in the market, and the market itself acts as the main factor that directly influences the setting of rates.

Types of bonds that affect interest rates:

1) 2-year bonds;

2) 5-year bonds;

3) 10-year bonds;

4) 30-year bonds.

The most powerful influence is exerted on rates of 10-year and 5-year securities, and the bond market itself is characterized by a high level of volatility.

By analyzing charts and considering 10-year securities, in the event of a price jump, we can assume a rapid rate cut.

If the market fluctuations are characterized by either an increase or a decrease (compensation payments), this fact affects the interest rate for customers. If market fluctuations for the day were not significant, then the bets, most likely, will not change.

Daily rates are determined in the office. As a rule, in the morning.

Interest rates are determined based on current market prices, at a fixed point in time.

Many factors of an economic nature affect the interest rates at the stage of credit registration (for example, housing in the US, California).

Very high interest rates provoke fluctuations on the stock exchange, which, consequently, affects the securities market and bonds in particular.

An increase in the dollar provokes a decline in bonds, and with a decline in oil prices, securities are also declining.

Economic events, worse or better than the expected result, contribute to the inflation of currency instruments, which include the US dollar, in the international forex market.

Among the main factors of the economy, which affect interest rates, the following are distinguished:

- orders for user-supplied durable goods;

- real estate sales;

- data on the trade balance;

- data on unemployment.

And among the key aspects provoking fluctuations in the markets, one can name data on production activity, inflation and employment growth.

A trader should have an idea about this, and understand that in reality there are many factors that determine the formation and setting of interest rates.