The USA’s central bank, the Federal Reserve, issues a statement after each of the meetings it holds to consider interest rates, although unlike it UK counterpart, it usually convenes only eight times a year rather than every month. Those statements, in a convoluted language that has become known as “Fedspeak”, are poured over by professionals investors looking for clues about the Fed’s future actions.
So it was that in September there was much debate about whether the minutes would drop the oft-repeated phrase “considerable time” when referring to how long the current 0%-0.25% range of interest rates would be maintained. Some Fed-watchers thought that the bank would abandon those two comforting words, not least because October marks the final $15bn purchase in the Fed’s quantitative easing (QE) programme. In the event, the Fed stuck to its “considerable time” mantra.
However, that was not quite the end of the story. Alongside each statement the Fed also produces a set of projections for future interest rates and these suggested that by the end of 2015 the short term interest rate would be 1.375%, 0.25% higher than the previous (June) projection. The corollary was that once that “considerable time” had passed, there would be a faster than expected rise in rates.
That prospect was one of the factors leading to a volatile second half of September for the investment markets. As happened last year with the “taper tantrum”, markets can become very jittery on the slightest hints that the era of loose money is coming to an end. The fact that the central banks will only tighten monetary policy once they are convinced their economies are recovering sufficiently strongly to cope seems to be ignored.
If the gyrations of the last few weeks have given you pause for thought, do talk to us before taking any action. Selling on the basis of “Fedspeak” translations is dangerous: the words could change at October’s meeting…