Fed Moves Emergency rate

The Federal Reserve raised on Thursday 18th the discount lending rate by a quarter point (from 0.25 to 0.75). The futures of the stock market overnight plugged directly after the announcement and it sent the Asian stock market to negative territory -2%.
After a long period of low interest rates inflation will be the threat for the next 2 years, The quantitative easing strategy is come to its end. The symbolic raise in the discount lending rate is the first milestone for future raise for benchmark interest. In the short term, we expect chairman of the federal reserve Ben Bernanke to ensure that the raise in the benchmark interest rates is not imminent while it actually is. As soon as we see low unemployment we can forecast a raise at any moment.

"Back to Normal Business"
Investors consider the world's financial system has been saved while there has been no substantial change in the financial system, investment banks and speculation can be back to normal business until the next bubble explodes.
Is it good news or bad news?
The change is actually some good news for the financial industry:
* This confirm the consolidation of the financial industry
* Financial institutions do not need "a rescue or emergency rate" that low since the profits and overall confidence between banks improves.
*Now the financial industry is stabilized, investors expect the real economy to confirm improvement with better results translated into corporate results.

Form a Forex perspective:
This is a normal move after the big fears of inflation due to the quantitative easing for too long Federal reserve has printed too much money.
Now we are going to fight inflation. If the inflation is as high as I think, we can expect the US Dollar to drop long term with short term consolidations every time the fed move the rate higher like on Thursday 18 feb, even if the raise was exclusively applied to the discount rate, investors can imagine a further tightening monetary policy.

Conclusion: We can see short term strength in the US dollar but probably long term fall.

If Central banks start to move rates independently, then we will be able to take carry trade opportunities each time. However, I suspect the Fed and ECB to raise fund rates in coordination in a similar fashion they lower them during the crisis.
*The Euro remains weak and maybe too dangerous to play against the dollar at this early stage after the Fed move. I would not recommend a buy in EUR/USD yet.

*However, a good technical opportunity can be to short USD/CHF.

Capital Markets
While I forecast a relative growth for the capital market indexes. I don't believe it is going to be a growth fundamentally based on the economy performance but the "Stock Market inflationary effect". Headlines will probably look for good news as a justification for the coming highs in the stock market while most of the primary effect will be inflation. We may see an relative growth in the stock market with corrections each time we see a raise in interest rates. The growth in interest rates will probably be gradual and carefully planned in the long run, as longer as it can be.
This is a typical effect, basically, we see cheap money (low interest rates) invested for a low price in the stock market (from March to April) then a short stabilization effect for the economy to respond slowly (April to February). Following we may see a lateral/down market due to profit taking and a remaining uncertainty for the next month and half. Then a sustainable growth in price with rhythmic correction each time interest rates are set higher. This last period is expected to last "as long as it can be sustainable for the borrower" i.e until the share of the interest payment in the annuity is higher than the amortization.
Strong inflation would be publicized as good inflation generated by an improvement on the economy and the stock market going up with financial reports justifying it but the actual reason is inflation and the consequences of the quantitative easing. (See: Stock Market Inflation Cycle, previous post).


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