NEW YORK (TheStreet) -- Back in August, in an interview with CNBC, chief economic adviser at Allianz SE Mohamed El-Erian said, "I would have hiked earlier and I would have gotten off zero earlier, but it's easier to say with hindsight. We know that there was a moment when domestic data was relatively strong and international data was okay. Now, the international data is really scary, and therefore the Fed has lost the opportunity when it had some alignment."

It was yet another torturous moment for investors, looking for any clue that the U.S. Federal Reserve might or might not raise short term interest rates after nine years of no hikes and six of "zero interest rate policy" (which has the catchy acronym ZIRP).

September and October haven't been any better, with another opportunity passed to raise rates and then weak domestic jobs data giving little confidence to do so any time soon. Basically, the Fed's scheme for an interest rate hike this year isn't going as planned.

In earlier months, thanks to ample forward guidance by the Fed, the markets and the economy were buckled up and ready to go with the first rate hike, but the Fed's hike-plane never really took off. Following last month's weak jobs report, economists and observers are holding that the Fed will keep an interest rate hike off the table for this year, despite Yellen saying the opposite in September.

"The mixed data support our expectation that the Fed will tilt to the side of caution during the process of policy normalization, implementing future rate hikes only at a very gradual pace," Bob Hughes, senior research fellow at the American Institute for Economic Research, told the International Business Times last week

The "mixed data" also sent the markets into a tizzy. Initially, amidst fears with a slowdown in the U.S. economy (reflected in its jobs numbers), the Dow Jones (   was down 258 points, or 1.5% only to reverse its course later, closing with a 200-point gain for the day the day, the biggest swing in four years according to CNBC

This could be the results of the markets knowing that an interest rate should be coming for years, but not seeing it happen. Market reaction to the Fed interest rates depends on a number of factors, like investors' perception towards risk, whether the change is anticipated or unanticipated. Unanticipated changes usually have significantly large effects on markets than anticipated changes due to the market's forward looking nature. In an early study by Roley and Sellon (1995), bond prices set in forward-looking markets should respond only to the "surprise" element of monetary policy actions, and not to the anticipated movements in the funds rate.

Perhaps this market's jittery nature is due to the unanticipated surprise of continuing to have ZIRP. The reaction to any change in interest rates depends on how that change is anticipated and how it is interpreted as a signal of future policy. Even though the changes in interest rates affect the markets, they may not always be considered a "major influence on equity prices," per former fed chair Ben Bernanke. One reason for this is that stock market investors usually discount anticipated changes in monetary policies. That's of course why such changes may influence equity prices at the time monetary policy changes are announced.

The decision of the Fed has been so prolonged and anticipated for so long that investors are operating in a unique trading environment, in which changes have all but been priced into the market, but haven't taken place.

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.