Since the market was introduced to the third bout of QE last year, risk assets – such as equities – have rallied.
The party was seemingly brought to an end in May this year when chairman of the Fed Ben Bernanke announced that he would scale back the asset-purchasing programme if the economic recovery gathered momentum.
Markets tanked that day and have effectively moved sideways ever since.
Performance of indices year to date
Source: FE Analytics
Although employment levels and the US housing market seem to have gained positive ground, the central bank postponed its tapering plans and instead will carry on with its $80bn-a-month stimulus programme until at least Christmas.
Markets have surged on the back of the announcement, with both the FTSE and the S&P rallying by more than 1 per cent in a day. Gold has also had a strong day – up around 5 per cent at the time of writing.
Despite the market spike, a number of high-profile experts have voiced concerns. FE Alpha Manager Stewart Cowley, who runs the five crown-rated Old Mutual Managed fund, has been one of the most outspoken critics.
He says that although equities may continue to rally in the short-term, the Fed’s decision to postpone tapering is the worst possible move, not only for investors, but the global economy as a whole.
"This is an extremely disappointing reaction by the Fed," Cowley said.
"Clearly, they have taken note of the slowdown in the accumulation of bank assets since their mis-communication in June and July, which sent bond yields up by nearly 1.5 per cent, and have extrapolated that into the housing market."
"But the market reaction just shows how hooked on the QE process the US economy still is five years after the collapse of Lehman Brothers. This is nothing to cheer about. It will make the eventual day of reckoning even worse for the bond and equity markets."
"I suspect the euphoria won't last long: we are now engaged in the biggest game of 'Chicken' the world has ever seen."
"Investing in US government bonds has become the equivalent of running into the middle of the motorway to pick up pennies," he added.
David Buckle, head of quantitative research at Fidelity, was equally damning.
He says that although Bernanke’s decision may have some merits, it shows a clear lack of forward guidance. He questions whether the Fed has any clear game plan, putting investors in a very bad position.
"The Fed gave forward guidance relating to a specific variable. Now it tells us that variable is too poor to be usable," Buckle said.
"In the same press conference, Bernanke told us that 'an unemployment rate of 7.3 per cent is well above acceptable levels', but that the unemployment rate isn’t a good measure. The 7 per cent tapering target and 6.5 per cent rate-rising threshold have been watered down."
"We aren’t getting forward guidance at all."
"By his own admission, communication was to be Bernanke’s key policy tool. That tool has now been severely blunted."
"The reason for this delay is that Bernanke says he is not seeing sufficient evidence of an improvement to the economy. Importantly, he said monetary conditions have worsened, implying the recent yield rise has worried him."
"He suggests there are fiscal headwinds and real wages are flat. I disagree with the latter: as of the latest release, average earnings are well above core CPI and tax receipts from individuals continue to improve (that’s why the budget deficit is improving so quickly)."
"Economically, Bernanke’s decision might have some merit, but the Fed’s credibility has taken a mighty fall," he added.
One management group that predicted this “surprise” announcement was CF Ruffer.
FE Alpha Manager Steve Russell told FE Trustnet in July that he didn’t expect the Fed to taper QE, and was still factoring in high inflation.
"We see this tapering as one of the speed bumps along the way, but we’re not at the end of QE and the beginning of tightening – that’s a long way off in the grand scheme of things," Russell said at the time.
The manager holds 33 per cent of his CF Ruffer Total Return fund in index-linked bonds. He also has 6 per cent in gold and gold equities – another asset class that has been boosted by the Fed’s decision not to taper.
The price of gold has rallied 4.73 per cent today and currently stands at $1,369. However, the precious metal has still lost money over the last year.
Performance of gold over 1yr
Source: FE Analytics
Julian Chillingworth, chief investment officer at Rathbones and manager of the five crown-rated Rathbone Blue Chip Income & Growth fund, says that the decision will see markets remain very jittery in the lead-up to Christmas.
"Ben Bernanke, despite coming to the end of his tenure, showed that he still has the ability to wrong-foot markets," he said.
"The Fed got cold feet on the back of some disappointing data points and has questioned the ability of the US economy to take the strain of higher bond yields."
"This will lead to increased speculation over the next few months on taper-timing, market sensitivity around data, and worries about any longer-term inflation risk.”
"A secondary consideration is Fed concern around the upcoming US debt negotiation, which could lead to more volatility," Chillingworth (pictured) continued.
"Similar to the US, the Bank of England’s minutes revealed a central bank that was not yet overly-excited about the strength of the recovery. Either central bankers are playing the game of keeping rate rise-forecasting in check, or they are genuinely very sanguine about the data."
"To some degree it is starting to feel like a game of cat and mouse," he added.
Tomorrow, FE Trustnet will delve a little deeper into the implications of the Fed’s decision not to taper and will look at whether investors should be re-focusing their attention now QE is set to continue.