The Federal Reserve's decision not to taper its quantitate-easing programme, contrary to what many were predicting, shows that it thinks its rhetoric is working fine for the moment, according to Chief Investment Officer Haig Bathgate.
Policy makers obviously believe the recovery isn't yet strong enough to reduce the monthly $85 billion of stimulus, but it's not as if Fed actions of late haven't had any effect on markets. Fed Chairman Ben Bernanke's musings about the possibility of an end to the extreme support measures have already led to a significant increase (and in our minds an overreaction) in US long-term rates.
Those increases have also had a considerable economic effect. Industries that depend on credit, such as home building and car manufacturers, have been performing a little too well on the back of ultra-low rates, and the increase is helping stave off a bubble. But the rest of the economy, while in recovery, is still chugging along at a modest pace, and the unemployment rate of 7.3% remains above the Fed's 6.5% threshold for raising rates from near zero.
With that in mind it's understandable that the Fed isn't yet comfortable with reducing its stimulus programme. However it can't keep QE up indefinitely – when it eventually starts to cut back seriously on asset purchases and boost rates, we have long said that may be the time to move some money from equities to protect against a possible temporary shock to stockmarkets. That time, though, is still some way off.
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