As noted yesterday and earlier this morning, the surprise Fed discount rate hike has everyone guessing as to the motivations:
• Response to political pressures;
• Proof the Economy is improving;
• Inevitable ending of extraordinary accomodation;
This will be debated for a while, but the US markets will cast its verdict shortly.
Usually, I consider day to day market action nothing but noise. The exceptions come when there is an unexpected action that was not anticipated or discounted by traders.
Hence, there might be some message to be discerned if we: 1) gap down hard, then trade lower all day, closing at lows; b) gap down hard, struggle back near flat; iii) something else entirely.
The caveat is we should be reluctant to read too much into the knee-jerk reactions of millions hyperactive, adrenal-charged traders and increasingly, algo driven boxes.
Note the Fed’s statement with the discount rate hike:
“Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy . . .”
However, smart Traders tend to react to and anticipate, deeds and actions, not words and speeches. To paraphrase Ralph Waldo Emerson, “I cannot hear what you are saying because what you are doing is speaking so loudly.”
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