Global markets rally as Fed reduces QE but pledges to keep rates low

Investors take the Fed's announcement as a sign that the US economy is strong enough to support further stock market gains

Global shares rallied today after US Federal Reserve took the first steps towards scaling back the country's vast economic stimulus drive, but promised to maintain interest rates low.

The Fed’s decision to trim quantitative easing by $10 billion a month marks a radical change in monetary policy from the world’s biggest economy. But outgoing chairman Ben Bernanke praised “encouraging” signs on jobs and reassured markets that interest rates will remain close to zero long after unemployment drops below its 6.5% threshold.

Dealing rooms took their cue to pile into equities around the world, lifting London’s FTSE 100 Index nearly 1% after strong overnight gains for Tokyo’s Nikkei, up 1.7%. Across Europe, France’s CAC40, the German Dax and leading Spanish and Italian bourses also showed gains of more than 1%.

The reaction is in stark contrast to eight months earlier, when Bernanke’s first hints at so-called tapering sent stock markets into a tailspin.

The US economy is now growing at the fastest pace among the leading economies despite deficit-cutting.  Unemployment also fell sharply to 7% in November — which triggered the tapering.

CMC Markets trader Matt Basi said the renewed optimism could send the FTSE to new all-time highs early next year. “Previously good news was bad news because it brought forward the chances of tapering but markets are showing that they can soak up $10 billion (£6.1 billion) a month in tapering. Good news becomes good news again. I don’t think we will see [a FTSE record] this year but I could easily see the FTSE 100 heading past 7000 early next year and cracking on from there.”

Brenda Kelly, senior markets strategist with IG Group, added: “Markets dislike uncertainty so, although the notion of shallower liquidity might have had the consequence of a protracted sell-off, market participants can now focus on the underlying issues without the constant ‘will they, won’t they’ taper concerns.”

The better economic prospects from the US also encouraged investors to dump safe haven assets such as gold — which dropped as much as 3% to $1198 an ounce, slipping below the $1200 mark for the first time since June.

Economists expect the Fed to take its foot further off the monetary accelerator in the months ahead as Bernanke, left, hands over the reins to new chairman Janet Yellen.  ING Bank economist Rob Carnell said: “Now the genie is out of the bottle, it is reasonable to expect further tapering at coming meetings, depending on the flow of data.”

The pound saw its biggest daily rise in a month against the dollar after  the Fed’s commitment to low rates for the medium term but gave up the gains later.

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