So, this is interesting.
The Federal Reserve did not raise interest rates at its September meeting. This is not surprising, per se. There were numerous international banks and organizations, plus tons of U.S. economists who worried that an increase would be too soon for a fragile economy.
Here is where it gets weird.
The stock market LOVES to plunge in reaction to a rate increase. Sure, it only lasts a day or two, but there’s nothing quite as fulfilling to a stock market index as dropping 200 or 300 points whenever the Fed raises interest rates.
The catch is that Wall Street actually secretly loves interest rate hikes. A Federal Reserve increasing interest rates is the equivalent of a stern father taking away our credit card for our own good. The market throws a temper tantrum, of course, but it’s better for everyone in the long term. If the Fed raises interest rates, then there won’t be an inflation boogeyman.
Based on all the pundits and analysts out there, it sure seems like the stock market was expecting a rate increase and all ready to throw its fit and wring its hand, probably just until the weekend, but still.
However, the Fed did not raise interest rates, and it wasn’t even close. The Fed voted 9-1 not to raise rates. In today’s Fed, that’s basically unanimous. The one guy who voted to raise interest rates always wants to raise them.
The result on Wall Street?
Um… well, we were all prepared to do this big selloff and have a panicky end to the week, and we didn’t really have a backup plan.
The reality is that nothing really changed today, so nothing has really changed on market either. The end result is the market basically trading around unchanged until it decides to look at something else.
For now, the long-term deal is this. The Fed will have to raise interest rates sooner or later. The exact timing really isn’t that big of deal because
- a) the increase will be super small, just 0.25%
- b) interest rates out in the economy already reflect this
- c) there will need to be several rate increases in order to get interest rates back up without bumping the economy
- d) savings interest rates are at minimums, but they won’t go up until the Fed rate is at least 1.0% which is a year away unless the economy takes off
- e) corporations that wanted to take advantage of low rates by issuing bonds or recapitalizing already have
The end result is that for speculators, getting that one day of volatility will just have to wait. The Fed is scheduled to meet in October and December this year. While that is technically two meetings, the rate goes up in October or not in 2015 at all. No one wants rates to increase during the holiday shopping period.
That means the odds of an October increase of just 0.25% are pretty likely unless something happens between now and then. So, if you want to get your short-term play on, set up your volatility move for the October meeting.
For long-term investors, this is a loud, but quickly passing storm. Pay it no mind.