Elconin: The Most Over-Hyped Federal Reserve Bank Decision Ever
In the next hour, the Federal Reserve Bank is expected to announce a modest rise in interest rates. In addition, dovish commentary from the Bank is expected, stating that this rate hike is warranted based on the anticipated strength in the economy to combat future inflation and that any future rate hikes will be data dependent.
Now that we have all the information beforehand, what is going to happen in the financial markets? At this time, the indexes are flat after erasing most of Friday's steep decline on Monday and Tuesday.
Crude Oil is continuing to spiral down, which was once the primary component on which inflation was gauged. Nervous Nellies are piling into the gold market in anticipation that whatever the Fed does is going to create uncertainty (typically the case for gold).
Traditionally, higher interest rates have been an overall negative for the market. As interest rates rise, stocks and bonds become less attractive investments due to interest-rate bearing investments becoming more attractive. However, in this current environment, it would take a major rise in rates to match the returns of higher yielding dividend stocks or funds. Surely, this could never happen without the economy grinding to a halt.
Extreme Volatility Ahead
So what can we expect following the announcement? Extreme volatility. With the absence of bona-fide market makers to cushion the impact of the move, high frequency firms will withdraw the quotes from the futures and equities markets and wait to feast on any order that comes into the marketplace.
When there is uncalculated risk or uncertainty, they simply fold up shop to avoid any unnecessary losses, only to return when there are retail or institutional orders to prey on.
For The Average Joe Investor
So, how should the average investor view this momentous event? Simply speaking, the answer is from the sidelines. Perhaps waiting a day or two to observe the price action to determine if anything has really changed. If so, follow the waiting period with asking how the numbers changed and what necessary adjustments should be made to relevant portfolios.
Although the market may fluctuate wildly in the next few hours, there will be plenty of rip-roaring rallies to sell into if liquidation of lighting of the portfolio is warranted. On the other hand, if the long-standing bull market is to continue, there will be frightening dips to increase one's exposure to the equity markets.
Sit back relax and enjoy the fireworks. Who knows, in a few days the markets may just be in the exact same area as they are now— and that is after the most anticipated Federal Reserve Bank decision ever.
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