Fed Announcements and the Market

jws43yale · #1 08-07-2007, 02:37 PM

As an Econ major and moderately serious investor I feel I have a pretty good understanding of both the Fed and the stock market. Consensus expected the interest rate to stay the same and it did. The Fed also mentioned credit markets as a cause for concern but are not easing their stance on fear of inflationary pressure. All of this was expected and there was nothing in the FOMC announcement that appears out of the ordinary to me. Yet after the market being slightly up, it plummets over 0.5% in a knee jerk reaction. Maybe I missing some essential element, but I don't understand why the reaction occurs that way and so quickly. Is this just an irrational psychological issuer, or is there something more solid to it? I am just interested to hear some thoughts.

spino1i · #2 08-07-2007, 02:40 PM

this is exactly my thoughts. Investors are not reacting rationally to the Fed's comments. Im beginning to think its a real opportunity to make $$$ in the future..

jws43yale · #3 08-07-2007, 03:07 PM

I understand that the market is volatile after any announcement, but how does basically no new news drop the Dow 100 pts in 15 minutes and then have it accelerate back to up 50 pts. on where it started. Thinking more about it, I am assuming that volume remains down in wait of the announcment and a first wave of major institutions, hedge funds, etc. react one way and quickly move the market.

spino1i · #4 08-07-2007, 03:13 PM

my Dad offered up the following explanation: no one wants to buy right as the fed makes an annoucnement, as people want to buy knowing whats going on with their stocks. So no one buys as the fed makes the announcement, and buy the laws of supply and demand, stock prices temporarly drop.

DcifrThs · #5 08-07-2007, 05:23 PM

the most logical reason i can think of is that it wasn't expected. markets have a tremendous amount of certainty of a rate cut this year priced in such that if that looks less likely, stocks can look less attractive to those who were betting on a change in monetary policy concern.

so really "nothing new" doesn't mean "nothing tradeable."

Barron

CrushinFelt · #6 08-07-2007, 05:54 PM

fed fund futures implied that there was a 96% chance of the rate staying the same as of this morning.

DcifrThs · #7 08-07-2007, 06:01 PM

[ QUOTE ]
fed fund futures implied that there was a 96% chance of the rate staying the same as of this morning.

[/ QUOTE ]

for which meeting?

fed funds futures aren't eh best wayt o calc market pricing anyways. options on those futures are and i know yesterday there was a massive % implied bettingo n a cut by year end (40-50%).

so which methodology did you use to get 96% of rate staying same by end of year (or was that just for this morning or for today's and next meetings?)

Barron

hlacheen · #8 08-07-2007, 06:25 PM

Do falling or stagnant home prices but a significant damper on inflation?

irunnotgood · #9 08-07-2007, 06:36 PM

[ QUOTE ]
Do falling or stagnant home prices but a significant damper on inflation?

[/ QUOTE ]

A damping effect, but will most likely lead to a rate cut, which lowers the value of the dollar and a increase in inflation.

Phone Booth · #10 08-07-2007, 07:04 PM

[ QUOTE ]
As an Econ major and moderately serious investor I feel I have a pretty good understanding of both the Fed and the stock market. Consensus expected the interest rate to stay the same and it did. The Fed also mentioned credit markets as a cause for concern but are not easing their stance on fear of inflationary pressure. All of this was expected and there was nothing in the FOMC announcement that appears out of the ordinary to me. Yet after the market being slightly up, it plummets over 0.5% in a knee jerk reaction. Maybe I missing some essential element, but I don't understand why the reaction occurs that way and so quickly. Is this just an irrational psychological issuer, or is there something more solid to it? I am just interested to hear some thoughts.

[/ QUOTE ]

I'd say the market, on the whole, did expect a slightly softer stance on inflation. If you were a competent reporter, you may attribute the drop to a combination of noise and the small chance of a significantly softer stance on inflation not materializing. There really isn't much to look; a temporary market-wide decline of half a percent is not something that you can necessarily attribute to any fundamental factor.