The Federal Reverse or the Fed meets eight times per year and uses its Federal Open Market Committee (FOMC) to announce monetary policies. In the recent FOMC, the Fed kept its target for the federal funds rate or the benchmark for most interest rates at a range of 0% to 0.25%. It is the same as the prior FOMC announcements leaving the target rate unchanged. Chairman Powell reiterated the Fed’s stance to keep rates at current levels until inflation increase above 2% to achieve maximum employment and sustain the economic recovery.
The goal of FOMC is to promote maximum employment, stable prices, and consistent long-term interest rates. Since the Fed Funds rates can impact interest banks charge each other, the action of the FED when rising and lowering the Federal Funds rates is critical to economic stability, economic recovery, inflation, cost of borrowing, lending activities, among others.
The Fed controls the Fed Funds Rate, which directly influences the prevailing U.S. interest rates such as prime rate, credit cards, car loans, mortgages, and other lending rates. Fed typically lowers interest rates to allow for cheaper rates for businesses to borrow money, invest, and hire employees to strengthen the economy. FED lower interest rates to entice consumers to spend more and borrow, leading to higher economic growth. When the economy is growing too fast, and inflation skyrockets, the Fed will increase interest rates to slow down spending and borrowing.
Although it is difficult to know when the FED will begin to change their monetary policies, a quick analysis of the Effective Federal Funds Rate chart may offer insights into the policy change.
The following Effective Federal Funds Rate (0.08) chart, dating back to 1972, suggests that when the monthly RSI indicator first enters oversold levels (below 30), it has resulted in the Effective Federal Funds Rate staying at oversold levels for 38-months to 49-months.
For instance, oversold conditions developed during Dec 1990-Feb 1994, Apr 2001-Aug 2004, Mar 2008-Apr 2012, and recently from Mar 2020-present. The average duration of the three (3) previous oversold conditions comes to around 42-months.
Although the past does not necessarily repeat itself, it tends to rhyme.
Does this imply the current 16-months duration of oversold reading is still in its early stage? Can the Effective Federal Funds Rate remain in oversold levels for another 26-months until Oct 2023, when it nears its prior historical average? Does a low Effective Federal Funds Rate suggest the Fed is far from rising rates, and inflation may not be as troublesome as expected?
Although a higher-low pattern (0.5/0.6) suggests a potential bottom, there remains key initial resistance at 0.15-0.20 (May 2010 and 2013/2014 highs). A breakout here warns of the start of a sustainable recovery toward 0.35 (the bottom of the long-term downtrend channel and the extension of the prior breakdown).