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Background: During the meeting on December 13, 2023, the Federal Reserve (Fed) decided to keep interest rates at the level of 5.25% - 5.50%. The market's expectation is that interest rates have peaked and no further increases are anticipated. There were at least two immediate impacts of the decision:

  • The S&P 500 index immediately increased in value from around 4660 to 4710.

  • The exchange rate between the EUR and USD rose from 1.078 to 1.093.

My Intuition:

  • Given that interest rates in the USA are relatively high, I would expect that the decision to maintain them at the same level would decrease the value of stock indexes because the money is still expensive.

  • Similarly, high interest rates make investments like U.S. bonds more lucrative, so I would expect more investors to switch from other currencies into USD, strengthening it.

Question: What is the intuition behind the market's reaction to the Fed's decision, and why might my intuition be incorrect?

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    You are missing the critical part of what creates a market reaction - how does the news differ from what was assumed previously? Yes, interest rates were kept the same, but with strong indication of rates being lowered 3 times over the next year. This would represent a faster drop than previously assumed, on average, by the market. So this wasn't "interest rates remained high" it was "interest rates are assumed to be dropping more than previously thought". The remainder of your analysis is thus backwards - eg. USD should weaken relative to other currencies, given int income would be less. Commented Dec 14, 2023 at 16:16

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What is the intuition behind the market's reaction to the Fed's decision, and why might my intuition be incorrect?

Some people thought the Fed would do A

Some people thought the Fed would do M

Some people thought the Fed would do Z

But things are never that easy. The Fed did something else.

Before the announcement investors anticipated what would happen, and invested accordingly.

What happens immediately, short term, and long term to markets depends on what investors thought would happen, and what they did in advance.

This is why sometimes the market reacts to expected news differently than the headline would suggest.

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Most importantly what Grade 'Eh' Bacon said in a comment: The fed indicated they will be lowering rates next year.

Even in June and September when the fed simply abstained from hiking the rates the market saw noticeable increases. No rate change is better than an increase, a hint of a decrease is better than nothing, and an actual decrease is better than a hint of a decrease, etc.


Aside from all that don't forget that Mr. Market is just your irrational business partner and what he decides the value of a business is from one day to the next is only an indicator of his own mood swings and conspiratorial mind and often not an indicator of anything tangible.

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