This is going to be a short post. I've been thinking about the stock market dropping on Friday, not just for Singapore, but for Japan and the US as well. It doesn't make much sense, people were looking forward to the rates remaining near zero and it did happen, yet there seems to be a negative response.
The interest rate staying near zero, which is the lowest it could possibly go before people are starting to be paid for borrowing money which doesn't make any sense at all, would be positive for the stock market. Low interest rates, low risk-free rate and so higher prices for shares.
The only possible thing is that the Fed is expressing some caution over the uncertain global economic and financial issues, but these are things that have been present for a while already. It just seems so strange that the market has been hoping for something yet drops when it actually occurs
I am surprised no market rally after fed decides not to increase interest rates.
ReplyDeleteHi Sweet Retirement,
DeleteMe too, but then the market is driven by people who may make irrational choices at times
Looks to me that the federal funds rate is no longer an economic throttle. It’s an instrument of behavioral finance, or psychology.
ReplyDeleteActually the federal funds rate is an extreme short-term rate, an overnight rate only. While this rate doesn’t affect long-term interest rates (which are a function of supply and demand, and an important factor in investment decisions), the stock market, nevertheless, reacts frenetically to its every change or non-change (when a change was somehow expected).
Nobody really understands why overnight interest rates should have such an effect on the market, but everybody thinks they do, and so they do.
Hi Tacomob,
DeleteI agree that the fed interest rate seems to have lost most of its bite in this example. But I think that the overnight rate has an effect on the long-term interest rates, if overnight rates go up, long-term interest rates would increase as demand would have at least in part shifted towards the short-term loans and also to make the long-term loans as attractive as the short-term ones.