The entire global economy now clings precariously to one crucial phenomenon. That is, how much longer can the central banks of the developed world artificially suppress interest rates at near-zero percent?
The violently-negative market reaction to Janet Yellen’s comments during her first press conference was a clear indication of how vulnerable the stock market is to the eventual reality of rising interest rates. All Ms. Yellen did was remind investors that the Fed Funds Rate would have to be moved up from zero percent–probably beginning in the middle of next year. That was enough to send the major averages cascading downward faster than you could say the words “flash trading.”
In typical fashion, a cacophony of Wall Street Cheerleaders were quick to dismiss the negative market reaction by claiming investors misunderstood what the new Chairperson meant to say; or that the rookie Fed Head simply misspoke. And, more importantly, these bubble-apologists were also quick to make the case that even once the Fed eventually gets around to raising interest rates, it will merely be a sign of economic health–a move that the equity market should fully embrace.
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