The Federal Reserve's federal funds rate, currently set in a range of 3.5% to 3.75%, represents the overnight lending rate for excess reserves among US commercial banks. This rate is not directly applicable to personal savings or loans but serves as a key tool for the US central bank to influence broader financial conditions. As the global benchmark, the Fed's rate is pivotal for carry traders, who may seek to profit from interest rate differentials between currencies.
Where to begin
Globally, most nations maintain interest rates below 10%, while a select few exceed 20%. High interest rates are typically associated with elevated inflation, as the real rate—adjusted for inflation—is what truly impacts currency valuations. Central banks generally view a 2% to 3% inflation rate as healthy, and a neutral interest rate slightly above this threshold can help curb inflation without discouraging lending. The US rate of 3.5% to 3.75% currently falls within this neutral range.
Why just 10 ASX 200 shares?
Examining nations with rates above 20%, Venezuela tops the list at 59.12%. This implies a monthly rate of nearly 4.9%, far exceeding the annual returns of many other countries. However, holding the Venezuelan bolivar for interest income is not feasible due to the country's extreme inflation. Venezuela's June CPI year-over-year rate was 544.1%, more than 155 times the US inflation rate of 3.5%. The real interest rate in Venezuela is -454.98%, meaning the currency's purchasing power would erode rapidly.
Turkey follows with a 37% rate, though its June CPI was 31.75%, indicating a real rate of 5.25%—still above the Fed's upper limit. Despite this, the Turkish lira has depreciated significantly. Over the past decade, the USDTRY exchange rate surged from 2.9 to 47.5, a 16.37-fold increase. In 2023 alone, it rose 18.75%, and a further 20% depreciation is anticipated in the latter half of the year. This massive devaluation renders the 37% nominal rate insufficient to compensate for currency losses, let alone the modest real return.
Other countries with rates above 20%, such as Zimbabwe, Argentina, Nigeria, Lebanon, Malawi, and Iran, face similar challenges. These nations grapple with high inflation, currency devaluation, or geopolitical instability—like Iran's conflicts with the US—making simple carry trades impractical. Market risk remains, and investment decisions should be made with caution, as past performance does not guarantee future results.
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