Given that former Federal Reserve Chair Ben Bernanke first began talking about investors reaching for yield back in May of 2013, Wednesday's move by the Fed might count as the most pre-signalled policy shift in modern history. It is therefore a measure of how monetary policy (and its corollary, currency policy) is drowning out almost all other signals that the Fed’s decision has dominated the markets in recent weeks. This is not to downplay the importance of the first U.S. rate hike in close to a decade (an eternity for financial markets) but, nevertheless, it rings alarm bells for those (like us) that worry about the underlying instability of the current market environment. So what do we make of the decision to hike policy by 25 basis points and the subsequent price action?
The first thing to say is that, as we have been arguing, the Fed would prove slightly more dovish than expected (emphasising in particular the word "gradual"). Given the forces in play (from lower oil prices to a stronger US dollar) this was to be expected. This, then, is starting to look like the environment we thought would emerge with a Fed that, while hawkish, is careful not to disturb the market's equanimity. Looking ahead to 2016 this therefore looks like the US dollar bullish and equity market bullish environment we thought would emerge.
In the event, the Fed Chair's press conference has added little to the picture other than to re-emphasise the word "gradually" and to note that future moves will remain data dependent. It was interesting to note that US dollar strength was noted (even if only to highlight that it's impact was being dampened by domestic factors) as well as that the Fed remains aware of developments in international markets (even if concerns have abated since last summer).
Looking at the market activity (beyond the high volatility in the FX market - something of a given now) and a logical shift in yields, the most significant movement continued to emerge from the oil markets. This might prove the area of real interest in the days ahead.