Yesterday`s response was very unusual. In the past stock markets dropped when the Fed had RAISED the interest rates. Dovish statements like this week´s Fed commentary usually induced gains on the stock market. For months the market had been preparing for an interest rate hike, the raise was already priced in. The uncertainty if the Fed hikes or not caused a lot of anxiety and turbulences. Now the market has to wait six more weeks until the next Fed meeting (October 27-28).
Yesterday´s drop suggest that a rate could have started a new rally because it would have created clarity and would have been interpreted as a sign of confidence. Instead the indecision will continue the uncertainty which has been troubling the financial markets for months. There is a high risk that anxiety and turbulences will continue through end of October. I think the markets will stay nervous as they are.
The Fed´s indecision shows that the authority is pessimistic. It seems that the market - hedge fund managers and other professional money managers - is naive and believes that Janet Yellen & Co. have superior knowledge. They don´t, they just made a mistake (I explained the reason for a hike here driveby). So the Fed raised the already high level of pessimism.
I suppose that in the coming weeks the economic news - including US retail sales and job market and from China´s economic front (driveby) - will refute the Fed and may raise the likelihood of an interest hike in the last October week.
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