SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Strategies & Market Trends : TA Science Projects & Experimental Indicators
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: HeyRainier who wrote (211)10/19/1998 1:24:00 AM
From: ftth  Read Replies (1) of 237
 
My latest science project: FED intervention versus stock prices.
I plotted the Federal Funds Rate versus the NYSE composite index from 1987 thru today. Why? Because I'm always skeptical of "conventional wisdom" and because I wanted another data point regarding the significance of the latest Fed moves.

"Conventional wisdom" says when the Fed lowers rates, stock prices go up, and vise versa. Chalk this up as another market myth.

There is no significant correlation whatsoever. No useful conclusion regarding stock prices can be drawn from changes in the Federal funds rate. Yes there are periods when there is a strong directional correlation, but there are more periods when there is not.

It would appear that a Fed rate change acts much like an earnings surprise. The market will focus on that one number for a short period (both in anticipation and after-the-fact), but the memory of it fades fairly quickly. After the memory fades, the ability of that number to support prices is nil. A rate change, like an earnings surprise, is more of a micro influence. Shortly thereafter, the macro "big-picture" expectations for the future dominate price action.

When the macro picture and the micro picture are congruent, you get the "conventional wisdom" case. When they aren't, you don't. In other words, a rate cut will only have a lasting positive effect if there is a credit crunch. In Greenspan's own words (Oct 7):

'We are far short of anything that could resemble a credit crunch in the United States. To be sure, there are all sorts of difficulties lots of people are having borrowing. But it is by no means evident that this is having as yet a significant impact on the real variables."

and Richmond Fed President Broaddus Oct 15:
"I don't think we're anywhere near a credit crunch at this stage."

Hmmmmmmmmmmm.
dh
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News