INterest rates??

Dear Guys

I am confused about the interest rates and how it affects the currency.

When the feds increase the rates are they talking about the

 

1. Intrest rates which we get when we deposit money in account
2. Or, the rates which bank charge to us when we take a loan.

If some one can guide me to any website on this subject or reply, i will be really thanksful.

regds

zamir

It's all the same thing. What they usually cut is called the "short term interest rate" which is the rate that the fed charges to lend money over shorter time frames. That then becomes a basis rate that banks expect, and a basis rate that banks tend to pay.

This in fact becomes the basis for a lot of lending instruments, but isn't necessarily the end rate. A savings account may pay higher, and a mortgage rate will certainly cost you more. When I was working w/ BofA we'd often set our credit card rates as "fixed X% over prime" so that a 3% over prime (which is currently 3 basis points over the fed rate) would be a 9% rate until a fed change.

Wiki links
http://en.wikipedia.org/wiki/Federal_funds_rate
http://en.wikipedia.org/wiki/Prime_rate
http://en.wikipedia.org/wiki/LIBOR

As you can see most end retail customers will end up paying based on the prime rate. The prime is based on the fed rate normally, but can change.

Interest rate hike > good for the currency
Interest rate cut > bad for the currency

All you need to know as far as forex is concerned.

Thanks for your help..