The Inside Scoop on the Fed's Big Announcement

If you look at the Dow’s performance today, something moved the market in a big way right around 2:00 PM EST. As the clock struck two, the benchmark index plunged 60 points, only to rebound higher suddenly. What happened to cause such a commotion on Wall Street?

Well, this afternoon the Federal Open Market Committee (FOMC) unveiled its latest policy decision regarding its ongoing low interest rate policy. And this month, the Fed kept the federal funds rate unchanged at between 0.25% and 0.50%.

As I’ve written before, the current low interest rate policy draws fixed income investors to the stock market. And because rates here are still higher than other major markets around the world, foreign capital continues to flow into the U.S. markets.

The Fed made the smart move, in my opinion. Inflation still remains below the Fed’s 2% target, and economic growth remains modest. Even last week’s surprising Q3 GDP report had less-than-stellar details, including tepid consumer spending.

Now, the Fed did hint that it will likely raise rates in December. Nonetheless, the Fed reiterated that any rate increases would be gradual. Even the more hawkish members on the board only wanted to raise rates to a range of 0.5% to 0.75%. The Fed is also under a lot of political pressure to be accomodative, given that this is an election year.

As a labor economist, Janet Yellen undoubtedly wants to see further improvement in the jobs market. For this reason, I (and the rest of the world) will be watching this Friday’s payroll report very carefully. ADP released its own payroll report today, reporting that just 147,000 jobs were created in October. That was well below economists’ estimates of 165,000 jobs. For the Labor Department’s payroll report on Friday, the market is forecasting 175,000 new jobs for October. This would represent a slight uptick from the 156,000 jobs created in September.

In any event, if the Fed does raise rates in December, it’ll likely be a very minor increase, and a "one-and-done" deal. In the absence of significant inflation or economic growth, this is the best course of action for the central bank.

Sincerely,

Signed Louis Navellier

Louis Navellier

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