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Fed Raises the Interest Rate: What Does It Mean for Investors?

PART:
1 2 3 4 5
Part 2
Fed Raises the Interest Rate: What Does It Mean for Investors? PART 2 OF 5

Immediate Impact: Market Rose and Volatility Fell

Impact of the Fed’s decision on the market

After the FOMC (Federal Open Market Committee) declared that it raised the key interest rate for the first time in 2017, the market reacted calmly.

Immediate Impact: Market Rose and Volatility Fell

Immediate Impact: Market Rose and Volatility Fell

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However, major US indices (IVV) such as the S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite moved higher and closed on positive notes. The S&P 500 index rose 0.84%, the Dow Jones Industrial Average rose 0.54%, and the NASDAQ Composite rose 0.74% on March 15, 2017.

Volatility fell

The CBOE Volatility S&P 500 Index (VIX), which measures volatility in the S&P 500 Index, fell 5.4% on March 15, 2017.

In August 2015, the devaluation of the Chinese yuan (YINN) (MCHI) spooked the market. VIX rose 143% during the yuan’s devaluation. During the Brexit vote, the volatility index rose nearly 56% on June 23–24, 2016. It shows how major events increased the volatility in the S&P 500 index.

On March 15, 2017, markets reacted positively as the Fed showed a less hawkish move than the market anticipated. State Street Global Advisors’ chief investment strategist said, “the market was bracing for a much more hawkish tone from the Fed. The early reaction looks to be one of relief, that the market’s worst fears were averted.”

In the next part of this series, we’ll analyze how the US Dollar Index (UUP) performed after the Fed’s decision.

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