The Fed increased its key interest rate by 25bps but delivered fairly dovish forward guidance, with inflation and global economic conditions the driving force for policy in 2016. The guidance has rightly been interpreted as implying a very gradual flight path for interest rates. Market rate expectations remain fairly subdued, with 3 rate hikes priced in for 2016.

The markets initial response to the FOMC was positive but the festive celebration ran out of steam rather quickly. Markets began to fret about falling commodity prices, a stronger dollar, emerging markets, deflationary concerns and weaker economic growth. Volatility spikes will continue to dog markets through the turn of the year.

UK rate hike expectations were pushed back further as Mark Carney continued to row backwards from his summer comments on raising rates by year-end. Inflation remains close to zero, earnings growth slowed and input prices fell sharply; all backing the BoE’s current stable rate policy.

Although the BoJ failed to expand QQE last week, it introduced measures to boost the sustainability monetary operations. These technical measures should be seen as positive but with inflation persistently below target the BoJ is delaying the inevitable – further loosening in policy.