Updated: Dec 29, 2021
So the big question is why did the market shoot up after Jerome Powell’s press conference, in which he clearly accepted inflation as a real problem, and also that they will be choosing a more aggressive interest rate hike in the next year. The market was timid for the last few weeks over concerns that the fed is going to raise interest rates. As I had explained in my earlier articles on how decreasing interest rates increases borrowing capacity, and in turn increases the cash flow in the economy, and makes the economy boom, increasing interest rates works opposite. Companies that had borrowed money in the last one year will have to pay more, people will refrain from borrowing (compared to last year), so less money in the system, less buying happens, so less production, so everything goes down systematically. And the recent Inflation figures (which I hardly believe in) raise serious concern and the fed was forced to raise interest rates. The market expected the fed to go aggressive on raising interest rates and go further and beyond just doubling down on tapering. Fed decided to raise interest rates but didn’t go beyond doubling the taper rate. And the most important thing to notice is that the fed didn’t go aggressive on raising interest rates instead it chose a faster way that looks aggressive to the common eye. If you look at the targ et level for the interest rates (according to fed members), the long-term goal hasn’t changed at all. The same 2.5% was estimated in September.
Target levels as of September
The latest target levels
So, the market had already priced in a 2.5 % interest rate and expected the fed to go beyond 2.5% for the long-term seeing the insane inflation rates, but the fed didn’t. Fed has just chosen a faster method to increase it but to sum it up, it is going to stand at 2.5% in 2025 or later. And people also expected that the fed could go up to 1.5% next year to combat inflation, because we may see a 10% inflation rate by the end of Dec, again if the fed is honest in accepting it, which doesn't seem to happen, and the rates could stand at 1% at the most. Adding to this, there were rumors that the Bank of England is planning for a sudden increase in interest rates, so if England can do it what is stopping the fed from suddenly increasing the rates, so it was believed that the fed is going to up the interest rates suddenly, which actually didn't happen. So basically the stock market overestimated what was about to come. That’s the reason why the market felt that the party is going to continue. Gold and silver markets which has been stressed since Feb rose up. Silver especially showed strong gains the following day