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The market reacts to FOMC

27/09/2018

The outcome of the Federal Open Markets Committee (FOMC) meeting was pretty much as expected. The Federal Funds rate which serves as the baseline for multiple forms of consumer debt as well as savings accounts was raised by 25 basis points (0.25%), and there is nothing in the way of evidence that the current monetary policy plan is likely to be derailed any time soon. The funds rate increase will be felt immediately in increased prime rate and credit card charges, but its ripples in other areas take longer to arrive . So why did the markets react as if they were disappointed ? Well, there is a very simple explanation for this, and it’s not one you will read about in any of the online commentary. All the economists and analysts will be dissecting the statement of Fed Chairman Jerome Powell and looking at inflation forecasts for several years forward, but the real truth is that the foreign exchange market is far too short term to include such factors into day-to-day trading. Traders will have forgotten all of this tomorrow. The real explanation owes everything to pragmatism and nothing to economic forecasting. It’s simply that everyone was positioned the same way and there were no surprises. In these circumstances traders who are Long are waiting for someone else to step up and value that asset at a higher price. If no new buyers emerge, in this case because there was no new stimulus provided, then wise traders that see the chance to lock in some profit tend to grab it while they can.

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