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By Paul J. Lim
September 18, 2015
A trader works on the floor of the New York Stock Exchange while Federal Reserve Chairwoman Janet Yellen explains why the Federal Reserve chose not raise interest rates on September 17, 2015 in New York, United States. Traders had speculated for weeks over whether the fed would raise rates or keep them at near zero percent interest.
A trader works on the floor of the New York Stock Exchange while Federal Reserve Chairwoman Janet Yellen explains why the Federal Reserve chose not raise interest rates on September 17, 2015 in New York, United States. Traders had speculated for weeks over whether the fed would raise rates or keep them at near zero percent interest.
Andrew Burton—Getty Images

The narrative on Wall Street heading into Thursday’s Fed meeting was simple: Janet Yellen better not raise interest rates because doing so would wreck the stock market by slowing the already sluggish global economy.

So on Thursday, the Federal Reserve did precisely what the bulls on Wall Street wanted and kept rates near zero.

And how did investors react? By selling, of course.

The Dow Jones industrial average sank nearly 300 points at the open on Friday morning. By late morning, the benchmark index was still off around 200 points, after falling 65 points on Thursday following the Fed decision.

In the bizarro logic of Wall Street, it was because by failing to raise rates, Yellen & Co. confirmed that the global economy poses a real threat.

Never mind that investors were arguing that exact same point 24 hours ago. And never mind that investors argued that by keeping rates at zero, the Fed could save the U.S. economy from being infected by the global slowdown.

It just goes to show that the Fed can’t win by giving Wall Street what it wants.

It also goes to show that the Fed did nothing to bring resolution to this situation by wimping out and keeping rates artificially at zero for nine years, ever since the depths of the global financial crisis.

By essentially kicking the can down the street, “we will go back to the fretting about the Fed’s timing and the interim data which will be sliced and diced,” notes Liz Ann Sonders, chief investment strategist for the brokerage Charles Schwab.

Indeed, investors are already debating whether the next rate hike could take place at the Fed’s next meeting in October, December, or if the central bank will wait until early next year.

But the narrative is also shifting in a dangerous way.

Before the market meltdown in late August, the assumption was that whenever the Fed begins lifting rates, it would do so slowly and gradually over months if not years. That gave investors some sense of comfort as to what to expect, market strategists say.

But by arguing for the Fed to delay, the “no hike” crowd may themselves be creating the uncertainty that could lead to more market volatility.

As Janney Montgomery Scott strategist Guy LeBas notes: “The academic work all suggests that the longer the Fed waits, the faster they’ll have to hike” once they start raising rates.

And could that be what eventually undoes this bull market?

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Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

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