Fed muddies the waters

At this stage world equity markets appear to have been relatively unresponsive to the surprisingly dovish Fed statements supporting its decision to leave interest rates on hold. The initial spike in US markets was reversed by the close of trade. This appears likely to translate into a subdued opening on the local market this morning.

While US stock market reaction to the Fed’s decision to leave rates on hold was limited, there have been more significant moves in bond markets, the US Dollar and gold. This may see support for gold stocks in today’s trading.

The Fed’s statements indicate that it’s putting significant weight on the fact that global economies and financial developments are currently exerting downward pressure on inflation. At the same time the stronger $US has already exerted some tightening influence on the US economy. This leaves open the question of whether there is likely to be enough improvement in global economies to improve the inflation outlook by the end of this year. There now seems a greater probability that the first US rate hike will not occur until next year.