In practice
Interest rates set the return on holding a currency and the cost of borrowing across an economy. When a central bank is expected to raise rates, its currency usually strengthens; when cuts are expected, it usually weakens.
Higher rates also make safe returns more attractive than stocks and than gold, which pays no interest. Traders track what the market expects for coming meetings.
What to watch for
Markets trade expectations. By the day of a decision the change is usually reflected in prices already, and the reaction depends on what the central bank signals about the future.
Related terms
3 terms- FOMCThe Fed committee that sets US interest rates, eight times a year: decision at 2:00 pm, press conference at 2:30 pm.
- Central bankThe institution that sets a country's interest rates: the Fed, ECB, Bank of England, Bank of Japan and others.
- Safe havenAssets investors run to when scared, like gold, the yen and the Swiss franc (risk-off); the opposite mood is risk-on.