The Federal Reserve made a announcement yesterday that shocked the market. The FOMC statement contained a number of changes in its assessment of economic variables, but none more prominent than its announcement that it will not raise its benchmark interest rate this year or next.
The statement had an immediate effect on the market, with stocks shooting up, commodity prices soaring and bonds yields tumbling. This was largely due to a drop in the US dollar, which weakened as investors dumped their currencies in response to the surprise news.
The biggest beneficiaries of the announcement were companies which have large amounts of debt. This is because the lower benchmark interest rate means that the companies’ cost of borrowing is now much lower, allowing them to borrow more cheaply, enabling them to expand and invest.
At the same time, companies whose profits are linked to higher interest rates, such as banks and insurance companies, saw their stock prices take a hit, because now their future revenues are likely to be lower.
The Fed’s announcement also meant that the yield on 10-year US treasury bonds has now fallen below the yield found on 3-month treasuries, a phenomenon known as an inverted yield curve. This phenomenon is usually seen as a sign of an impending recession, and many analysts are now predicting that the US economy is heading towards a recession.
The news from the FOMC statement may have surprised the market, but it was largely expected. The Fed had already hinted that it was likely to be cautious when it came to raising interest rates given the current economic climate. The decision to hold off from raising rates until the situation in the US has improved has been welcomed by investors, as it is seen as a sign of confidence in the US economy.
It remains to be seen how the market will react to this news in the coming weeks and months. For now, investors are keeping a close eye on the Fed’s monetary policy as they try to discern the direction of the US economy.
