The US Federal Reserve stunned markets this week by maintaining US$85 billion of quantitative easing (QE) asset purchases a month, confounding consensus estimates that monetary policy normalisation would begin this month, as a positive reflection of the recovery under way in the US economy.
The Fed’s balance sheet will thereby continue to grow, having risen from about US$1 trillion when QE began in 2009, to almost $4tn this year, with a reduction in asset purchases likely to now take place over a more drawn-out timetable, and probably not ending completely until nearer to the end of next year. An interest rate rise in the US also appears to be a prospect for further out, with an eventual unwinding of the QE already in the system not expected to occur for a number of years to come.
The message for financial markets in general and for equities in particular would seem to be a positive one in the first instance, in that the monetary stimulus taps will remain on for much longer than previously assumed.
This is also an encouraging signal for emerging markets, which have suffered over the summer as fears grew that QE was about to come to an end. However, there are also significant risks that stem from delaying the exit from QE, especially given the uncertainty created by the Fed appearing to change direction.
Read more: Fed’s QE decision could bring confusion and pain down the road | The National
The Fed’s balance sheet will thereby continue to grow, having risen from about US$1 trillion when QE began in 2009, to almost $4tn this year, with a reduction in asset purchases likely to now take place over a more drawn-out timetable, and probably not ending completely until nearer to the end of next year. An interest rate rise in the US also appears to be a prospect for further out, with an eventual unwinding of the QE already in the system not expected to occur for a number of years to come.
The message for financial markets in general and for equities in particular would seem to be a positive one in the first instance, in that the monetary stimulus taps will remain on for much longer than previously assumed.
This is also an encouraging signal for emerging markets, which have suffered over the summer as fears grew that QE was about to come to an end. However, there are also significant risks that stem from delaying the exit from QE, especially given the uncertainty created by the Fed appearing to change direction.
Read more: Fed’s QE decision could bring confusion and pain down the road | The National
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