The Fed’s announcement today sent stocks soaring. From a CNBC story:
U.S. stocks surged on Wednesday, with the Dow marking its best session of the year, as investors celebrated a rally in the energy sector and the Federal Reserve’s pledge to be patient in raising interest rates.
Stocks rose after the Federal Reserve retained the phrase “considerable time” in its policy statement, and also introduced another word, “patient,” as the central bank readies to raise interest rates next year.
Specifically, both the S&P500 and Nasdaq indices were up more than 2 percent. In her remarks Fed chief Janet Yellen said that the Fed would likely keep rates pat for a “couple” more of its meetings, meaning that the first rate hike wouldn’t occur until April (if then).
Here is some historical context for the virtually 0% federal funds rate the U.S. has had since 2009:
If you think that interest rates serve a function in the market economy, helping to allocate scarce savings among possible investment projects, then you should be very concerned that the Fed’s policies for the last several years have been distorting the entire capital structure of the economy. To learn more, check out this collection of essays on so-called Austrian business cycle theory. For a quick fable that introduces the idea, here’s my “sushi article.”