Pay close attention to the US Fed

DESPITE not raising the Federal Funds Rate (FFR) as was widely expected in the Sept 20 Federal Open Market Committee (FOMC) meeting, the US Federal Reserve continued to spin out a hawkish tone as it announced the commencement of the US$4.5 trillion balance sheet reduction. It will start tapering US$10 billion per month from October, and raising the amount gradually in the months to come if the economy grows in line with expectations.

A long-term study of the rate hike cycle since the 1970s shows a telling picture of its impact on the equity market. The Fed, with the smartest and brightest people on board, has the best knowledge about the health of the economy. Any action by the Fed on monetary policy had been indicative. The moment that it…