The Federal Reserve kept interest rates the same, leaving many to wonder what the implications are going to be for the broader markets and exchange traded funds (ETFs).
The decision keeps the interbank overnight federal funds rate at 2%, where it has been since April, report Mark Felsenthal and David Lawder for Reuters.
The financial markets, at least until a few days ago, expected the Fed to keep the rates steady. But interest rate futures markets had recently shifted to price in a quarter-point rate reduction after Lehman Brothers (LEH) filed for bankruptcy, Merrill Lynch (MER) was sold to Bank of America (BAC) and American International Group (AIG) scrambled for cash.
Obviously, the markets didn’t initially like the decision, and stocks are turning lower after their hopes were dashed that the Fed would try to calm the volatility, says Tim Paradis for the Associated Press. The Fed noted growing strains in the financial markets and a continued weak labor market, but said that it expected its policy moves to ignite moderate economic growth over time.
One ETF that did like the move is the PowerShares DB US Dollar Index Bullish (UUP), which shot up 1.5% after the announcement.
The Fed’s choice should keep oil prices moving downward, as well, which can only be good for the economy and the mood of consumers. Oil tumbled below $92 a barrel, sending crude back to its year-ago levels, reports Stevenson Jacobs for the Associated Press. As Wall Street deteriorates, there’s growing evidence that consumers and businesses will continue to cut back, despite falling prices.
On CNBC this morning, it was said that for every dollar that oil drops, it’s $1 billion that’s going back into the economy. Oil has fallen 37% since reaching a record high above $147 on July 11.
We’re now back to where we were last year. If we can sustain this into the winter months, there’s a big advantage for the economy in there.
For full disclosure, some of Tom Lydon’s clients own shares of UUP.