The Dow Jones Industrial Average edged up marginally a day after it became apparent that the US Federal Reserve was planning to cut $95bn a month from the central bank's holdings of Treasury bonds and MBS Holdings.
There can be no doubt that equity valuations have been supported ever since central banks across the globe ramped-up liquidity in the aftermath of the global financial crisis. The only surprise is that it took as long as it has for The Fed to take its belt in. But with inflation accelerating on the back of swollen money-supply in the economy, and limited monetary tools at its disposal, it had little option than to run-down its balance sheet.
Minutes of the Fed's March 15-16 meeting also showed that some officials are considering raising interest rates in 0.5 percentage-point increments in upcoming meetings. The main question for investors is the extent to which successive rate rises could have on market liquidity, though it’s worth pointing out that interest rates remain well adrift of historical averages.