After the world’s central banks, led by the US Fed, started wheeling out giant monetary stimulus programmes to counteract the global financial crisis in November 2008 the markets soon followed suit in spectacular fashion.
Equities in particular have enjoyed golden days ever since.
Wise investors would therefore be well advised to understand this week’s key central bank developments and how they might affect the markets in future.
On Wednesday evening markets expected the Fed’s 0.25% rate rise. But some were surprised by accompanying detail indicating the Fed intended to press ahead with further rate rises in 2017 and begin reducing its $4.5trn QE balance as early as this year.
Fed chair Janet Yellen said signs of cooling inflation and wage growth in the US economy were no cause for concern, but market-side experts doubted that the central bank would be able to proceed with more rate cuts this year in light of the downward trend.
More worryingly, some also pointed to the relative flatness of US Treasury yield curves as a sign the markets may be expecting poor growth or even recession – which would only be exacerbated by central bank tightening.
There is pressure on central banks to ‘normalise’ their interest rates to avert the risk of future inflation catastrophes after years of QE and low rates.
On Thursday, minutes from the Bank of England’s rate-setting meeting last month – where rates were held – surprised because there are now three rate-setting panel members voting for a rate rise, suggesting rates could go up sooner than thought.
The news sent sterling soaring.