Rate rises are still on the cards.
That intimation from the Fed somewhat wrong-footed markets following the latest FOMC meeting, held on 20 September.
The previous consensus that the likelihood of rate rise before the end of the year has now risen from 50% to 70%.
All told, a more dovish tone had been expected, in part because the US is still reeling from the effects of recent hurricanes.
But it seems the damage has looked worse on US TV, computer and mobile phone screens than the Fed thinks it will actually be to the US economy.
So, although there is some concern about low inflation and high debt, on the whole the US is doing well enough and the Fed’s well flagged policy will not be driven off course by stormy weather.
Of course, an actual decision on rates will have to wait for further gatherings of the Fed’s board, but what does seem pretty well clear now is that the US will finally be brought right off the emergency stimulus of quantitative easing that has been sustaining asset valuations for night on a decade now.
Just how effective that stimulus really was in driving growth remains moot, but there’s no doubt that devaluing the dollar put a solid foundation under dollar-denominated asset valuations, and by extension the way most assets are valued round the world, and that this at least provided some sort of certainty to base ongoing economic activity on.
As everyone knows, there was panic on the markets following the global financial crisis, but we didn’t have the same kind of market apocalypse that followed the Wall Street Crash in 1929.
With the Fed artificially boosting asset prices, how could there be?
Gold benefitted too, at one point briefly touching US$1,900 an ounce. That relationship between gold and quantitative easing will now properly decoupled, although analysts will still, rightly, look at money supply when trying to provide meaningful explanations for gold price movements.
But actually, gold is a case in point about the effectiveness of quantitative easing in general. In the case of the US it came in three rounds, known after the fact as QE1, QE2 and QE3. Gold soared just on QE1, soared again on the mere announcement of QE2, but was lacklustre in the face of QE3.
That was the point when markets woke up to the diminishing returns of quantitative easing, and realised how, with policymakers keeping an eagle eye on inflation numbers, inverse correlations in price were no longer to be relied upon.
Nevertheless, there is still some trepidation, at least amongst the analyst community about what the end of QE will mean for wider markets.
If quantitative easing is withdrawn or, more properly, the Fed stops re-investing the coupons it receives from its existing bond portfolio, it might logically follow that that the historic inflation of asset prices will be unwound.
If so, then markets could be in for a period of turbulence more violent than anything we’ve seen in the last ten years. It would be a correction of significant scale.
But will it actually happen?
So far markets seem pretty sanguine about the possibility. There is some nervousness around about levels of Chinese demand, and concern too about political tensions in Korea and elsewhere.
But on the hawkish tone taken by the Fed in regards to rates and the ending of QE, not much movement. True, the dollar rose and gold fell, but those moves were broadly neutralised within a day or two as the implications of other events, like Donald Trump’s speech to the UN, were priced in.
And it may actually be that with gold no longer in such thrall to money supply per se, it will actually revert more to its traditional safe haven status in the medium term, instead of acting as the perfect dollar hedge in a zero interest rate environment.
What exactly that change in dynamic will do for the price remains to be seen, and it’s hard to know who will have the greater influence: a rocket man on a suicide mission, a central banker who may or may not have her job in a year’s time, or the US President, who may have all sorts of tricks up his sleeve that we don’t yet know about.