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The Fed Decision: Analyzing the Reaction

Just in case you are living under a rock and missed it, on Wednesday the new Fed chair, Janet Yellen, gave her first press conference following a rate decision. Fed release day always brings back memories for me. There was a unique atmosphere in a dealing room while awaiting the rate decision. Usually trading stopped and orders were withdrawn a minute or so before the scheduled release, even if nothing momentous was expected. All eyes went to the screens, waiting for the news. There was a sense of anticipation and excitement, but after a few years I realized that the strongest emotion was fear.

We weren’t afraid that the market would move against us; we rarely ran anything but the smallest position into the Fed’s rate decision. Rather it was a fear that something momentous or unexpected would happen and we would be left out. For those that are paid to trade, failing to react to news is a greater sin than getting it wrong. Little wonder, then, that the initial reaction to any news was usually an overreaction.

In many ways, things are different now. Computers and algorithmic trading programs are the ones looking to react immediately to any decision, but initial overreaction is still common. On Tuesday, when those computers and the traders heard talk of rate rises in the future, they reacted. The stock market dropped, bond yields jumped and the US Dollar gained against every major currency. Commodity prices fell in the face of Dollar strength.

The…

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