Wednesday saw the release of the latest Monetary Policy Committee minutes, and later in the day the result of the FOMC interest rate decision. The MPC appeared unanimous in maintaining interest rates at the current level as well as continuing the bond purchase program. Commentators seem divided on their opinion as to whether the Bank of England will raise rates in 2014. Some commentators pointed to unanimity amongst members to maintain interest rates, while others felt there was a more hawkish tone to some of the wording in the minutes. The bond market met the minutes with acute indifference, as 10-year gilt yields were sharply unchanged on the day.
In the US, the Fed reduced its bond purchase program by another $10bn as expected. In the post announcement press conference the Fed Chair Janet Yellen made it clear that US interest rate policy is going to be ultimately determined by the performance of the economy. When questioned about the recent data appearing to show that inflation has been picking up and its impact on interest rate policy going forward, the Yellen was at pains to express the Fed’s main focus is on reaching full employment, and that they would be prepared to take risks with inflation to achieve this goal.
The US treasury market reacted to the meeting in a similar manner to the UK gilt market, with complete unresponsiveness. The reaction that seemed the most telling was that of that of the Vix. The Vix has been creeping higher ahead of Wednesday’s meeting as investors probably wanted to protect themselves against any surprise change to interest rate expectations. As it transpired, there were no indications of a change in sentiment to interest rate policy and the Vix fell back close to the levels of a week or so ago.
When questioned about the level of the equity market, and concerns that the policy measures may be pushing valuations above historic levels, Janet Yellen responded that the committee felt valuations were currently within historic norms. These comments alone could well encourage risk-taking.
It feels hard to gauge what the Federal Reserve or the MPC truly think about how and when they will move to raise rates. One has to wonder a little whether they worry about how asset prices will react to a signal that rates could rise. The Fed appeared careful to do nothing to rock the boat on Wednesday.
The equity markets in the UK and the US rallied following the comments from Janet Yellen. Equity investor sentiment remains cautious, but one does worry slightly that investors could become more complacent as they seem to receive reassurance from the central banks that rates are not likely to move in the foreseeable future. The trouble with that is when it does come, the market will be less prepared for the event.