It’s pretty hard to ignore the big news this morning – the Fed hiked the discount rate by a quarter point to 0.75%. Now, this is different from an interest rate hike (known as the federal funds rate). The discount rate is the amount of interest the Fed charges banks for direct loans.
The move is designed to make it more expensive for banks to borrow from the Fed, thereby encouraging them to borrow from private sources.
Now, the Fed said in its last meeting that this move was coming. And I’m actually glad to see the Fed make a "surprise" move. By that I mean the markets got very accustomed to the Greenspan policy of only moving rates during policy meetings. That gives the market time to adjust ahead of the meeting. Some argue that strategy decreases the effect of the move.
With this surprise move, Bernanke has taken the market by surprise and forced it to adjust on the fly. That’s actually a good thing. I think it’s important for the Fed to show that it’s proactive.
What’s more, the Fed is also showing that it is intent on removing the emergency liquidity measures it took in the wake of the financial crisis. This is an important step toward addressing fears that cheap money will spark inflation.
The biggest takeaway from this move is that the Fed is showing confidence in the economy. The Fed clearly believes the economy is strong enough to start walking on its own, without the crutch of cheap money.
Of course, the Fed has also reiterated that real interest rates, or the fed funds rate, will stay low for an "extended period of time." And most still consider that to mean there will be no interest rate hikes until early 2011. And we can look at today’s Consumer Price Index (CPI) to see why.
Prices at the consumer level rose just 0.2% for the 5th month in a row. Take out food and energy, and consumer prices actually fell for the first time since 1982.
The reason is pretty clear: unemployment. With less demand, companies can’t raise prices. So clearly, the Fed can’t raise rates until the employment picture improves.
What Does It Mean?
So what does this move mean for the stock market? Frankly, not much. The Fed’s move will not affect corporate profits. And, until there’s an improvement in unemployment, no interest rate hike will be perceived as imminent.
The U.S. dollar, however, is strengthening. This will affect commodities prices. Gold, for instance, is down nearly 1% in the early going today. Of course, that move affects the Gold ETF (GLD) more than it affects the profit of gold mining companies, who are enjoying record profits with gold holding above $1,000 an ounce.
Also, oil prices remain strong despite the strength in the dollar. It probably won’t be long before oil breaks out of it’s current trading range between $73 and $81 and seeks higher prices.
The $5 coal stock I’ve talked about is now a $6.90 coal stock. That’s a 38% move in the last few weeks, so congratulations to any Daily Profit readers who joined Energy World Profits and picked up this stock on the cheap. Ultimately, I have a $14 price target for the stock. You can learn more HERE.
Trading Outlook from Jason Cimpl
Finally, some trading commentary from TradeMaster Daily Stock Alerts’ Jason Cimpl:
Traders who are long need not fear. Although the market is due for a pull-back after consecutive days trading higher, the trend still favors the bulls until 1085 is broken…The market still pushed higher in spite of the tepid economic figures: a bullish move that bodes well for more gains.
The SPX stopped within a few pennies of our 1107 price resistance. Now we want to see SPX find support around 1097 while 1085 is our must hold level.