GlossaryPolicy rates
Policy rates
The policy rates set by the four central banks that determine the price of money for a large part of the world: the Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia. The American curve leads and is colored by zones; the other three run alongside for comparison.
Zones of the US curve
| Range | Classification |
|---|---|
| below 1% | Near zero |
| 1 to below 2.5% | Accommodative |
| 2.5 to below 5% | Restrictive |
| from 5% | Highly restrictive |
Reference lines sit at 0, 1, 2.5 and 5%. Below 1% the background is tinted green, from 5% red.
The zones only apply to the US curve. A policy rate has no universal scale: 2% is the highest level in decades for the Bank of Japan, and for the Fed the lower end of what it considers neutral. The bands are calibrated to American history. The Fed's neutral estimate has been around 2.5% for years, and the last tightening cycles ended between 5 and 6.5%.
How to read it
- Level of the Fed: Where the price of the dollar stands, against which every asset in this terminal is discounted.
- Gaps between the lines: Rate differentials explain why capital moves between currencies. The gap between the USA and Japan is the basis of the yen carry trade (see “Yen Carry Trade Watcher”).
- Moving together and moving apart: If all four cut at the same time, monetary policy is easing worldwide. If they diverge, exchange rates often move.
Good to know
- Set, not traded: The lines show the rates as set. The overnight rate actually paid in the market can be a few basis points off. The “FEDFUNDS” study shows the effective US rate.
- A central bank is missing: If one of the four series is unavailable, only its line is missing; the others continue to be drawn.
- Timeframe: A policy rate changes a few times a year. Intended for 1D, 4D and 1W; on hourly candles, every visible section is a horizontal line.