It is one of those days when central banks take over the market. That Federal Reserve members voted overnight to keep US interest rates at 1-1.25% is no surprise. They are most likely keeping their powder dry until December, given the inevitable impact of hurricane season on third-quarter GDP and after downgrading inflation expectations.
Unanimous backing for so-called balance sheet normalisation, of the unwinding of quantitative easing, was widely predicted, too, and equity traders quickly reversed an initial jerk lower to finish the session at yet another record high.
We know US rates will head higher next year and that the Fed’s $4.5trn stockpile of assets will be sold off. Markets fear the unknown, but Fed chairperson Janet Yellen is no fool, and a promise to unwind “gradually and predictably” will avoid any shocks from pulling the rug away too fast. She has managed things well so far, and there is enough evidence here to keep investors onside.
There were no shocks in Japan either where stubbornly low inflation offsets economic recovery there. The local central bank had no reason to shift targets for rates or asset purchases at its latest meeting.
The ECB has been careful to keep at least one step behind US policymakers for fear of over-inflating the euro. However, the Fed’s taper decision opens up the way for a growing Europe to begin unwinding its own colossal balance sheet.
ECB President Mario Draghi has promised a decision before the end of the year, but it is unlikely he will pick a speech in Frankfurt today to confirm it.
Lee Wild is head of Equity Strategy at Interactive Investor