Markets were “surprised” by the US Federal Reserve’s latest minutes, which showed a new set of concerns that may discourage it from raising rates as soon as previously expected.
With the US’s programme of buying bonds to support the economy coming to an end this month, markets had been expecting policymakers to suggest they were closer to raising interest rates given the strength of the economy.
However, minutes from the central bank’s latest Federal Open Market Committee (FOMC) meeting were more dovish – meaning the members appeared not to want to raise rates soon. This boosted the S&P 500 index by 1.75 per cent to 1,986 points – the best daily rise in 2014 – with the Dow Jones also rising 1.64 per cent to 16,994 points.
Commentators said the minutes from the FOMC were slightly unusual in that they appeared to place more emphasis on factors beyond US borders.
Keith Wade, chief economist at Schroders, said weakness in the rest of the world was a key “concern” for the committee.
“Although the committee closely monitors external factors, in the previous meeting they had not been seen as materially affecting monetary policy goals, such as the 2 per cent inflation target,” he said.
“The persistent shortfall in eurozone growth and inflation is clearly the most important factor, but the minutes also mentioned that slower economic growth in China or Japan, or geopolitical events in the Middle East or Ukraine, could also pose a downside risk to activity.”
Mr Wade said the committee was also concerned about a strong dollar, whose strength “is set to send us in a more deflationary direction in coming months”, and could make the Federal Reserve halt when it comes to tightening policy.
“When combined with comments on the need to maintain a ‘considerable period’ between the end of quantitative easing and the start of rate rises, interest rate expectations have fallen back in the US,” he said.
TwentyFour Asset Management’s Mark Holman agreed the minutes had “once again surprised markets” with a dovish tone on interest rate rises.
“This time the concerns put forward by US policymakers centred around the impact of possible lower overseas growth and the impact of a stronger dollar, both of which are valid points,” he said.
“Markets responded positively to the news and US stocks enjoyed their best day of 2014 to date.”
Wouter Sturkenboom, investment strategist at Russell Investments, said he was concerned by how a slight change in sentiment from the FOMC could have such a strong impact on the market.
“It is worrying that the Fed can have such a major impact on the markets,” he said.
“At some point the market will have to stand on its own two feet and return to focusing on fundamentals.”
The strategist said the market’s reaction to a slight change in sentiment made it hard to estimate how the market would react when there was a rate rise.
“First, it is uncertain how much the markets have priced in the new trajectory of the Fed,” he said.
“Second, it has been such a long time since the markets focused on fundamentals and, while we think they are strong, it is not clear how the markets will react.”
But JPMorgan Asset Management’s global market strategist Kerry Craig thought markets would take a small rate rise in their stride.
“If you did see a small interest rate rise in the middle of next year, it is probably not going to change much for the investor,” he said.
“You need to look at the global recovery, which, while ugly, is moving in the right direction.”
