Case Study: The Impact of the Federal Reserve Boards Raising Interest Rates and Hurricane Rita on th

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FNCE 3020Financial Markets and Institutions
Fall Semester 2005

• Case Study The Impact of the Federal Reserve
  Boards Raising Interest Rates and Hurricane Rita
  on the U.S. Stock and Bond Markets September 20
  and 21, 2005

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Background

• Tuesday, September 20
• Federal Reserve Raises the fed funds rate 25
  basis points to 3.75.
• Indicates more hikes to come.
• Wednesday, September 21
• Hurricane Rita upgraded to category 5
• Heading for Texas and U.S. offshore oil rigs.
• 25 of U.S. production is from this area!
• Questions
• What did these two events do to the stock market
  and bond markets.
• Answer in terms of financial asset model
  developed in class.

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The Fed and Rita The Stock Market
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Stock Market Explanation

• Stocks seen as having more risk.
• Why?
• Higher interest rates.
• Pushing up cost of financing for companies.
• Perhaps the Fed is over-reacting.
• Economic may turn down.
• Impact of Rita on U.S. oil supplies and prices.
• Shift out of stocks in general
• Oil stocks rally!

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The Debt Markets Sept 21, 2005
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Bond Market Explanation

• In times of greater uncertainty, investors demand
  safety and liquidity.
• Where so they get that?
• Bond markets (i.e., U.S. Government Securities
  Markets).
• Outward shift in the bond demand schedule
• Pushes up bond prices and drives down yields.

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Outward Shift in the Demand for Bonds
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And What About Gold? Sept 2005
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Sources of Information

• Stock Index
• http//quote.yahoo.com/m2?u
• Bonds (Rates)
• http//www.bloomberg.com/markets/index.html
• Gold Prices
• http//fx.sauder.ubc.ca/