The market had expected the Fed to announce plans to reduce its balance sheet and increase rates – some commentators anticipating a September hike – but the Federal Open Market Committee voted to keep rates between 1-1.25%.
It said the decision came following solid realised and expected labour market conditions and subdued inflation. The Fed expects inflation to remain below its 2% target on a 12-month basis, but believes it will stabilise around 2% over the medium term.
Fed chair Janet Yellen offered no real hint as to when tapering might begin, only saying “relatively soon, provided that the economy evolves broadly as anticipated”.
The Dow Jones Industrials, S&P 500 and NASDAQ Composite indexes all set new record peaks in the wake of the meeting.
The Dow hit 21,741.38, while the S&P 500 touched 2481.11 following the announcement.
Meanwhile, the dollar slid to a 13-month low, dropping to $1.3157 against the pound.
Russ Mould, investment director at AJ Bell, said: “The US Federal Reserve may think it is talking tough but the financial markets clearly don’t think so, judging by new all-time highs in US stocks, a 13-month low in the dollar and six-week high in gold.”
He added the Fed’s caution left investors suggesting it could undertake just one rate rise this year at most, after the two quarter-point hikes launched in the first half of the year.
However, Mould noted that futures markets see things differently, believing there is barely a 50-50 chance of one more rate rise by June 2018. That is according to the CME FedWatch tool, which uses 30-Day Fed Fund futures prices to gauge the probability of an upcoming rate hike.
Elsewhere, Jake Robbins, manager of the Premier Global Alpha Growth Fund, said: “The fact that this may not be on the cards as soon as expected will likely see bond yields fall, particularly as US economic data has been relatively weak of late and political unrest always causes uncertainty. The dollar has been weak all year and this is likely to exacerbate this trend.”
“Companies with large overseas businesses should benefit, but more domestically focused sectors are likely to suffer as markets question their growth prospects. Financials particularly will not benefit from falling bond yields as this squeezes their profitability.”
Robbins said the trend for investors to move funds from the US to regions with relatively stronger growth prospects, such as Europe, was likely to continue until US economic data begins to surprise positively once again.
