Definition. The target range for the rate at which US banks lend reserves to one another overnight. It's set by the FOMC and is the Fed's main monetary policy tool.
How it works
Higher rates raise the cost of money in the economy and lower the present value of companies' future earnings. Lower rates do the opposite. Markets react not only to decisions but also to changes in expectations about future decisions.
Example
Inflation data above expectations reduces the chances of rate cuts. The stock market may fall even before the Fed meeting.
What to watch out for
Market expectations are often already “priced in”. Surprises trigger the strongest reactions.
You'll find the full explanation with graphics, examples and exercises in the 📖 Order flow encyclopedia space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).
