Inflation and Interest Rates By www.ProfitableTradingTips.com Manufacturing output and consumer prices are
up this month which according to Reuters is an indication of inflation turning the corner.
Next we will probably see the U.S. Federal Reserve at long last raise interest rates. U.S. consumer prices increased in October
after two straight months of declines as the cost of healthcare and other services rose,
evidence of firming inflation that further supports views that the Federal Reserve will
raise interest rates next month. The economic outlook also got a boost from
other data on Tuesday showing a fairly solid increase in manufacturing output in October
after dropping for two consecutive months. Unemployment is at 5% which is putting upward
pressure on wages. There are three factors pointing to inflation and interest rates are
likely to rise. U.S. Federal Reserve Forbes also notes that there is a reemergence
of inflation and interest rates are likely to rise next month.
Even before the latest inflation figures, the US numbers for October, the general consensus
was that the Federal Reserve is going to start raising interest rates at their December meeting
in the 15th and 16th of that month. Now that we’ve seen those inflation numbers barring
any further surprises then we’re close to a stone cold certainty that rates will indeed
start rising next month. It’s worth walking back a bit to see what the basic economic
problem here is. The Fed wants to keep inflation below 2% and
unemployment in the 4% to 5% range. The problem is that when the Fed raises rates it typically
takes a year and a half to two years for higher rates to work their way through the economy
and reduce inflation. That is why the Fed has been anxious to raise rates after keeping
them a near zero since the depths of the Great Recession. What does all of this have to do
with stock trading? Stocks, Inflation and Interest Rates Many stock traders simply buy and sell the
S&P 500 which is a good measure of the US economy. To the extent that the Fed manages
inflation and interest rates correctly the economy will prosper and stocks will go up.
When they mess up stocks eventually suffer. The Street writes about the S&P 500 and a
potential crash from a technical viewpoint. As noted last week, 2020 is an important level
of support for the S&P 500. It must be held to keep the bullish counts alive.
Sunday night, as most of the market seemed to be looking for a crash, the Trading Room
at Elliottwavetrader.net was setting targets for an expected rally Monday. The market hit
those targets. But, the question now is if the market can
maintain this uptrend or not. If the market declines steeply Tuesday, and provides an
impulsive pattern to below 2020, and into the 1990 region, that would provide a strong
warning of a much bigger decline to come in December. Even in that case, there will likely
be a wave ii retrace leading into Thanksgiving and back up towards the 2100 region. Whether the S&P 500 maintains or falls in
the short term it will respond to a healthy economy over time, providing that the Fed
does a decent job handling inflation and interest rates. For more insights and useful information about
trading stocks, options, futures or Forex, visit www.ProfitableTradingTips.com.