US share markets fell over 2.5% this morning following the decision of the US Central Bank (Fed) to purchase longer maturity US bonds. The aim of this policy is to keep interest rates lower for longer. The market was disappointed by this decision as it did not involve the creation / printing of more money as purchases will be funded by selling short-dated bonds. The market was also negatively impacted by the statement that they saw significant downside risks to the economic outlook. The decision did have the desired impact on bond markets with the US 10 year government bond yield falling to a very low 1.8%.
A major problem with the US economy is that companies do not have the confidence to invest and hire new employees. Consumer confidence has fallen in response to high unemployment, falling share markets, political uncertainty and negative headlines surrounding the size and financing of the US government deficit. Falling interest rates also have negative impacts upon those who are retired or saving for retirement as it reduces their spending power and increases the amount which they must save.
Looking forward therefore we expect US growth to remain subdued and consistent with the Fed expect economic risks to be on the downside. The good news is that this negative outlook is largely reflected in share market valuations which relative to low interest rates are attractive. In the short-term however, we to expect share markets to remain volatile given the continued negative headlines.