The wold’s biggest interest rate decision in a long time, the US interest rate decision for September, came and went and without much action.
If you’re wondering why it was the biggest interest rate decision, it’s because the world’s largest economy (or second largest, depending on who you talk to), and interest rates had been nailed down at 0.25% for 54 consecutive months. And after 54 consecutive months the US economy seemed to be improving – maybe even improving enough for a rate rise.
Another reason it was the biggest interest rate decision for some time was because of expectation. It had been talked up by economists, forecasters, pundits and people who make a living from blowing hot air on TV. Many of them were thoroughly convinced September was going to be the month US interest rates moved upwards.
Yet September made it 55 consecutive months the Federal Open Market Committee (FOMC) held rates at 0.25%.
It left a lot of egg on a lot of faces, three quarters of the 72 major economists polled by the Wall Street Journal said interest rates would rise in September, but being wrong hasn’t slowed them down. They’re all lining up again to offer forecasts for interest rates and economic data in October.
This prompts an old joke (still worth sharing) that might explain the intelligence level of some groups of people who make forecasts about financial markets.
When Albert Einstein died, he met three people in the queue outside the Pearly Gates.
To pass the time, he asked what were their IQs.
The first replied 190. “Wonderful,” exclaimed Einstein. “We can discuss the contribution made by Ernest Rutherford to atomic physics and my theory of general relativity”.
The second answered 150. “Good,” said Einstein. “I look forward to discussing the role of nuclear-free legislation in the quest for world peace”.
The third mumbled 50. Einstein paused, and then asked, “So what is your forecast for interest rates?”
And the joke can be amended to accommodate those who offer sharemarket forecasts. It is especially relevant if you followed the expert predictions on what the market would do after the interest rate decision.
For months many commentators had been lining up to explain how rising interest rates and the end of cheap money would conspire against the multi-year rally on US sharemarkets. And it seemed like those forecasts would be right.
Every good piece data that built the case for a rate rise was met by a sharemarket sell off. Hawkish comments from FOMC members were met with sell offs. Conversely, each poor piece of data prompted a market rally, and similarly, dovish comments from FOMC members also prompted market rallies.
This suggested an increase in US interest rates would lead to a market sell off, while rates staying on hold would allow the market to rally.
Yet when the FOMC held rates there was a significant share market sell off, contradicting previous market reactions and the predictions of the pundits who’d previously said holding would elicit a positive response and hiking would elicit a negative.
The explanation for the market fall was all about expectation – the lack of a rate rise led to the belief the Federal Reserve was not confident enough about the US economy. Meaning their failure to raise rates suddenly wasn’t positive news after all!
Previously the experts were confident hold was positive and increase was negative, but in the aftermath, hold became negative. So in the future will increase mean positive? Would you trust these forecasters to guide you? The market reaction shows there’s one thing to be certain about – no one ever knows how financial markets will react to news or data.
And we’re back to our ongoing point – no one with common sense makes predictions about the direction of financial markets.
Like the Einstein joke suggests, it’s a game for fools.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
