FED interest rate decision effects?

AKIN35

Newbie
Hi everyone,

I have a question in my mind that I couldn't find a satisfying answer.
As you know FED increased the interest rate on the last day and as I learned from economy books, this decision was supposed to affect the market:
Since money is shrinked
- dollar value was supposed to increase
- stock market was supposed to decrease
But both of them didn't happen and actually opposite happened. what am I missing? Why is it like that?
Could you please explain me?

Thanks
 

BigDeal

Active member
Many decisions are 'expected' and therefore considered 'priced in' already. If something unexpected happens, that's when you see a lot more volatility.
Interest rate decisions by central banks is a good example, as you've already seen. The expected future approach taken though also has a bearing (look up dovish / hawkish monetary policy)
You'll also notice it when a company publishes it's results - the share price is based on expectation, so when results are a lot better / worse, you tend to see a correction up / down to reflect this.
The NFPs are another good example
 

Atilla

Legendary member
As well as the information being well communicated, expected and factored in, you really need to make a distinction between nominal and real rates with inflation.

If you want to consider currencies as well then look at the Balance of Payments if positive or negative.

i.e. Raising rates by 0.5% is neither here or there when inflation is at 8% for March. Real rates are still negative. There are different rates as well. Thus look at real rates not nominal.

The stock market will increase because of inflationary valuations of stock and sales. Inflation is good for production because the cost at time t-1 will always be < less than when a product goes to market after value-added at time t+1. Longer the production process bigger the inflationary positive effect on sale price - cost price. Hence, looks good on results beating expectations due to inflationary pressures. Not all industries benefit, however. Higher prices can knock demand if purchasing power is reduced due to inflation.

One last point - they always say rates rise from a recessionary trough upwards as the economic cycle goes into recovery and boom. Rates peak at the top of the cycle and then go down as the economy goes into recession. Economic theory is not always what it is cracked out to be. Ingenious manipulations have a habit of distorting how the supply and demand pricing mechanism works.
 
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