What does the US Fed's QE-tapering delay mean for markets?

The US Federal Reserve's Ben Bernanke confirmed on Wednesday its decision to maintain asset purchases at $85 billion (£52.8 billion) per month.

At some point the quantitative easing (QE) will be reduced and eventually stopped. When this happens, commentators say the markets are likely to react with stocks, bonds, gold and commodities falling and the US dollar strengthening.

The Fed acknowledged that there has been "growing underlying strength in the broader economy", but wants to "await more evidence that progress will be sustained before adjusting the pace of its purchases".

Paul Ashworth, chief US economist at Capital Economics, says the Fed's decision will be immediately bond and equity positive.

He adds: "We wonder, however, whether the longer-lasting reaction will be increased volatility in markets, as the Fed's communications become even more confused.

"Clearly the Fed has been spooked by the extent of the surge in long-term interest rates over the past couple of months and the impact that now appears to be having on the housing market."

Ashworth suspects that the Fed will wait until December's Federal Open Market Committee meeting before seriously considering again whether to begin tapering or not.

Ken Fisher, chief executive at Fisher Investments, presents his alternative opinion in:Viewpoint: The shocking truth about QE.

Wayne Lin, portfolio manager for Legg Mason Global Asset Allocation, says the market expectation was for a reduction in asset purchases from $85 billion to $75 billion per month.

Lin says: "The initial market response was positive, with equities and bonds both gaining. The Fed was probably concerned about the recent, steep rise in mortgage rates, which was a direct result of expectations that the Fed would begin tapering soon."

He believes what could have impacted the Fed's decision is the upcoming budget battle in the US Congress - this could have impacted the decision to postpone tapering until after the budget is resolved.

Trevor Greetham, strategy chief at Fidelity, says this is bullish news for stocks and commodities, especially weak dollar plays in emerging markets.

Greetham says last night saw one of the most surprising central bank meetings in a very long time, with the Fed deciding not to start tapering QE.

He says: "The Fed now 'could' taper by year end and Bernanke is even talking down the importance of the unemployment rate as an indicator of when tightening may start and end. He seemed to be making policy on the fly, at one point accepting that they should maybe agree not to taper if inflation drops below a particular level."

Greetham adds: "You'd be forgiven for thinking the Fed is playing with your mind at this point. They've intervened massively in the markets and don't like the feeling when the markets react [negatively] to talk of exit."

Bad news for bond markets

Stewart Cowley, manager of the £927.9 million Old Mutual Global Strategic Bond fund, says he is extremely disappointed by the Fed's reaction.

Cowley says: "Clearly, they have taken note of the slowdown in the accumulation of bank assets since their miscommunication in June and July that sent bond yields up by nearly 1.5% and have extrapolated that into the housing market."

The fixed income expert adds: "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."

Keith Wade, chief economist at Schroders, says: "With regard to the markets, risk assets will enjoy the ride and bond yields have already fallen sharply along with the dollar.

"Bubble concerns could return but the Fed would only have itself to blame: it has missed a perfect opportunity to start moving policy toward the exit."

Patrick Connolly, certified financial planner at Chase de Vere, says: "Global markets have become reliant on loose fiscal policies, with huge sums of money being pumped into economies, driving investors toward risk assets such as equities.

Connolly agrees with Cowley and says the longer-term story isn't quite so positive for fixed interest.

He adds: "While a continuation of QE will support prices, yields on many assets are being held at artificially low levels and at some point are likely to revert somewhere back toward their norm and therefore having a negative effect on prices."