•The fed funds rate is a key tenet of interest rate markets and is used to set the prime rate, which is the rate banks charge their clients for loans.
•Changes in the federal funds rate can impact the U.S. dollar. Its increase typically increases interest rates throughout the economy.
Image: FILE
Hopes of the Kenya Shilling strengthening against the US dollar to the pre-2020 level of about 101 can only be realised sometime in September, according to market analysts.
The latest monetary update by the international research body, Economic Intelligence Unit (EIU), shows the US dollar will remain bullish against the local currencies for much longer amid high Fed rate which will be maintained for much longer.
“The Fed cuts will come later than we previously expected,” the report reads.
“We have pushed the forecast for the date that the Fed will begin reducing its policy rate to September, from June previously, and now expect a 50-basis-point reduction before year end (from 75 basis points previously).”
Federal funds rate is the rate banks charge each other for lending their excess reserves or cash, and it is a target rate set by the Federal Reserve Bank, used as a basis for the rate that commercial banks adopt while lending to each other.
Changes in the federal funds rate can impact the US dollar. Its increase typically increases interest rates throughout the economy.
The ripple effects then prompts global investors to sell their investments denominated in their local currencies, for instance in Kenyan shillings in exchange for US dollar-denominated investments.
The final result is a stronger exchange rate in favour of the U.S. dollar, which then strengthens against the local currencies. In this case, the shilling.
The Federal Reserve held its ground on interest rates in the latest review in early May, again deciding not to cut as it continues a battle with inflation that has grown more difficult lately.
The Federal funds rate has been between 5.25 - 5.50 per cent since July 2023, when the Fed last hiked and took the range to its highest level in more than two decades.
The impact of the strong dollar has had the shilling shed close to 31 unit values since early 2020 when it started weakening to exchange at 132.4 yesterday. Notably, the local currency had weakened to a low of 161 as of January 2024.
A weak shilling means costly imports, and the burden is often passed to the consumers.
The slight gain from January to date is on the back of the successful settlement of the inaugural $2 billion buyback plan, where the government paid back $1.5 billion in February, boosting investor confidence.