There was speculations floating around this past week that Fed might increase interest rate. Yet yesterday Fed announced that they were not yet increasing the interest rate. The market showed some good signs for an hour or two but then plunged back down. Why didn't Fed not raising interest rate boost the economy?
wow, you got a lot to learn, it doesn't simply work like that ... at best their would be a long term effect and even that is doubtfull cause it has only been postponed ... in the short run almost anything can happen: most likely a lot of short term traders weren't expecting the raise and took profits when that de facto got realised ...
Hi Phill Twist, Markets don't always react in the textbook way because markets are driven by humans (and algos, but these are created by humans and will reflect human thinking). As irrational as the equity market move may seem, it was actually quite clear in the grand scheme of things and tons of traders probably lost money due to it. It's how the top players make their bread and butter. First of all I assume you understand that markets are driven by order flow interaction with liquidity. Big money (banks, hedge funds, etc.) tend to have more control in the price discovery process because they trade larger sizes. Anyways, there are normally two types of news traders: 1) News spike traders; these are the guys that trade the print or outcome as soon as it becomes known. 2) Real news traders; these are the guys that trade after they have had time to digest what the news means. They are essentially trading the "reaction to the news reaction." Their flow (or lack of) causes price to make the next leg of a trend or range movement after time has passed, liquidity is returning, the news has been digested, and depending on how much of a mispricing is left. The second group of news traders don't initially trade the print because they know that around news times liquidity thins. The initial news spike usually, though not always, occurs on thin trading conditions rather than the big players entering large orders because if they entered as soon as a print hit the wires they might face slippage or partial fills. Now let's revisit what happened at the FOMC event. Pre-FOMC stocks had already risen and some may argue (myself included) that a dovish FOMC was already priced in due to a high probability of a no hike in September sentiment. This could of made a buy the rumor, sell the news type of play. Anyways, at the FOMC event interest rates were kept on hold and this is bullish for stocks because higher interest rates mean people will have less spending money which leads to a slowdown in the economy. The initial reaction was perfectly in line with this sort of thinking as equities initially rallied on the news, but after digesting the news as a whole the market sentiment was completely opposite. The reason being was that the smart money took Yellen's dovish comments as a sign that global growth fears were increasing. She even referred to recent global developments in growth and inflation as risks. A global economic slowdown is bearish for stocks, as you probably know. With the money not there to support the bullish move, the market followed the path to area of least resistance, the downside. Assessing the global market reaction (something you should be doing, especially for major fundamental events), we can see that this sort of thinking was in line with how global markets reacted. Gold - bullish Bonds - bullish USD - bearish Equities - bullish EM - Bullish The above reaction perfectly reflects how the market "should" of reacted on a Fed interest rate hold combined with fears of a global economic slowdown, and considering how the market was positioned pre-FOMC. I don't this sentiment will last too long, but anything can happen. I hope you somewhat understand the "why". Good luck!