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When the fed claims that there is a danger to growth going forward thus it will cut interest rates, the markets respond to such a statement by showing large gains. Thus we can see that the markets are not concerned with the danger to the fundamentals but are stimulated greatly by the prospect of increase in the money supply regardless of what is motivating that increase.

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It's not just that, stock market valuations should rise when interest rates fall. The present value of future earnings increase as a result. Also stocks become more attractive relative to bonds in reality.

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Yes, but this can only explain a very very small fraction of the price volatility in regards perceptions about the sentiment of the fed.

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and i'm assuming you have data to back this up?? because that was a central part to the claim that "fundamentals" (i.e. valuations) drive equity prices.

a small change in interest rates, imo, vastly changes the value of a stock since equities are basically perpetuities.

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Fed action --> increases liquidity from an artifical contraction ----> allows fundamental strength of the economy to be reflected in prices

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O I C.

When money markets reduce the supply of money that is artificial and when a quasi state institution increases it that is natural. Silly me.

Also the idea that a cut in interest rates was priced into the markets before this week is obviously blatantly false.

Before this week the perception of sentiment at the fed was viewed as hawkish on cuts due to inflationary pressures which switched to dovish this week as members of the fed committee and BB made several announcements that things were getting worse and thus cuts may now be required.

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the equity markets aren't the "priced in" center. the fed funds futures/options markets are. show me some data and i'll gladly analyze it.

i do think that futures markets have priced in much more cutting than previous to this week (obviously) but i'm not sure how much since i haven't seen the fed funds futures/options price changes.

Barron

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