The Fed's inaction leads to a rise in all tides

On Wednesday evening Janet Yellen announced that with her band of merry men they managed to kick the interest rate can once again down the freeway. As was widely reported there was dissent in the ranks as 3 of the 10 members of the committee voted for a rise at this meeting. In what seemed like a move to placate these dissenters, in her following statement Janet Yellen flagged the expectation that they still to anticipate raising rates before the year end. The market is now posting a small probability on October and an even money bet on December. One still feels that the opportunity was missed in July when the impact on the Brexit vote had been overstated and the US economy was looking modestly healthier.

The OECD announced on Thursday that they have increased their expectations of economic growth for the UK economy this year to 1.8%. They also went onto retract the view expressed in June that the Brexit vote would impact the global economy in a similar way to a hard landing in the Chinese economy. It does make you wonder why anyone listens to economic forecasters, as so often they usually fail to correctly forecast economic activity, often by being more pessimistic than the reality.

Equity markets were once again boosted by the Federal Reserve’s inaction. Equity markets appear to continue to be happy to be supported by the actions of central banks, and less concerned by the lack of economic growth. The Federal Reserve’s announcement, along with the rate decision, that they are lowering their long term growth forecasts for the economy seemed to drive buyers of all major asset classes.

The lack of change of interest rate policies and the accompanying weaker growth forecast led to a rise in US treasury prices. Yields on the 10 year US ten-year treasury which recently rose to 1.75%, have fallen back to 1.62% in the past few days. The US dollar weakened on the back of the Federal Reserve keeping rates where they are. This led to a recovery in oil and other commodity prices. The only asset that fell was the fear and greed index or Vix to give its correct name. In a sign that confidence or complacency has once again entered into equity investors, the Vix index fell sharply to close back just above 11.


Posted on September 22, 2016 .