The US stocks gained and the US dollar weakened to more than - two year low - as the Federal Reserve announced its "new approach to inflation".
This means that if the inflation goes upto 2% mark in the US economy, the US Federal reserve will not raise interest rates.
Interest rates are raised to control inflation.
As the interest rates go up, people in general tend to save more and spend less. This then reduces demand and hence reduces inflation.
FED's new approach
On Thursday - the US Federal Reserve - announced that it would seek to achieve 2% inflation goal on average.This means that if the inflation goes upto 2% mark in the US economy, the US Federal reserve will not raise interest rates.
Interest rates are raised to control inflation.
As the interest rates go up, people in general tend to save more and spend less. This then reduces demand and hence reduces inflation.
Inflation
It will take probably years for inflation levels to reach 2% in the US. This would mean that interest rates will not go up in the near future in the US.
So there will be more money with the investors to spend, and, to invest in the markets. The Fixed Deposits are going to yield negligible returns as interest rates are low and will remain low.
The co-relation between interest rates and stocks in US is very clear
The global equity markets followed the US Fed's announcement and rallied.
Best of both worlds
Stocks seem to be enjoying the best of both worlds. They are reacting to signs of improving economic momentum as well as accommodative monetary stimulus (lower interest rates).
How long this will continue, and when will the tide turn is anybody's guess.
(Disclaimer : This blog is for education purposes and not to solicit business and provide any kind of advice. Stock market investing is a with risk investing including risk on capital investing. Please take an informed decision)
