Last night the Fed released its statement after a two-day meeting on the future interest rate expectation. And the market went ballistic.
Below is the 30-minute chart of S&P500 and one can immediately see massive buying orders coming in at around 2pm (New York Time) during the announcement.
On the other hand the US Dollar got smashed around the same time, as shown in chart below.
All this is because the Federal Open Market Committee (FOMC) has removed a word “patient” from its statement. However, the core of its message remains the same.
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
That is, it will raise the interest rates when it sees that the economy has properly recovered. The Fed is trapped in an uncomfortable place: Wait for too long, it risks spiral inflation that plagued Germany during 1923; Raising the rates too early, and it risks derailing the recovery like the US during 1937. However given the deflationary state that the world sees itself in, I imagine that the Fed sees that the risk of waiting too long is lower than raising the rates too early.
The upshot from the two charts is that people are overly focused on FOMC statement in order to make their financial decisions. It is simply futile to predict the timing of the interest rate raise. And one should not be making financial decisions based on that timing. You are essentially rely on the decision of twelve people that you don’t know.