The Fed to the Rescue
US Fed chair Janet Yellen played the perfect central bank game overnight, fine tuning the Fed’s stance, preparing the markets for higher interest rates and simultaneously weakening the US dollar and producing a significant rally in bonds, shares and commodities. The positive impulse may be moderated in the Asia Pacific region where markets have been buoyed over the last week by a stronger USD.
In a balanced statement, the Fed board removed the forward guidance that has featured in every statement since 2008. While clearly flagging rate rises, the statement also hosed down forward rate expectations, painting a picture of much more gradual interest rate “normalisation”. The Board is now much more dependent on data in determining its action, potentially increasing market volatility around key releases and announcements.
In Australia the reaction is coloured by the quarterly share market futures expiry this morning. Huge volumes and the actions of fund managers as they re-shape their portfolios could determine market direction. A gain of around 0.5% is expected at the open. A further influence will be the reaction of Asian markets that have rallied strongly on a relative currency weakness and promised stimulus in China. Increased demand from the US may push back hopes of PBoC action, and result in selling.
For further comment from Michael McCarthy at CMC Markets please call 02 8221 2135.
Frequently Asked Questions about this Article…
Janet Yellen's announcement led to a weakening of the US dollar and sparked a significant rally in bonds, shares, and commodities. This was due to the Fed's balanced approach in preparing markets for higher interest rates while also moderating forward rate expectations.
The Fed removed the forward guidance that had been a feature of every statement since 2008. This change indicates a shift towards a more data-dependent approach in determining future interest rate actions, which could increase market volatility around key economic releases.
The positive impulse from the Fed's announcement may be moderated in the Asia Pacific region, where markets have been buoyed by a stronger US dollar. The reaction of Asian markets, which have rallied on relative currency weakness and promised stimulus in China, will also play a role.
The Fed's stance suggests a more gradual approach to interest rate 'normalisation,' which could lead to moderated forward rate expectations. This approach is likely to make the Fed more dependent on economic data, potentially increasing market volatility.
In Australia, the market reaction is influenced by the quarterly share market futures expiry and the actions of fund managers reshaping their portfolios. Additionally, the reaction of Asian markets and increased demand from the US could impact market direction.
Increased demand from the US could push back hopes for action from the People's Bank of China (PBoC), potentially leading to selling in the markets. This is because stronger US demand might reduce the perceived need for further stimulus from China.
Data dependency in the Fed's new approach means that future interest rate decisions will be more closely tied to economic data releases. This could lead to increased market volatility as investors react to key economic indicators and announcements.
Everyday investors can prepare for potential market volatility by staying informed about key economic data releases and understanding how these might influence the Fed's interest rate decisions. Diversifying investments and consulting with financial advisors can also help manage risks.
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