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September did not turn out as expected at the US Federal Reserve

Back in May, the Chairman of the US Federal Reserve, Ben Bernanke, sent shivers through global markets when he suggested that a change to the central bank’s easy money policy was within sight. Mr Bernanke said that the Fed was likely to soon cut back on its regular monthly purchase of bonds – then running at $85bn a month – and end all buying by around the middle of 2014.

While the markets always knew that the money tap – quantitative easing (QE) in the jargon – would be turned off sometime, to hear such truth from the man in charge of the Fed somehow came as a shock. In the following months, the Fed refined its message and the developed markets regained their equilibrium. However, emerging markets remained unsettled and expectations grew that the Fed would announce a cut of $10bn-$15bn in its monthly bond buying spree following its September meeting.

To the surprise of all but a few, on September 18 Mr Bernanke announced there would be no immediate reduction in QE: the Fed wanted to see “more evidence that [economic] progress will be sustained” before reducing that $85bn a month investment. At first the markets jumped at the thought of more cheap money, but a pause for reflection soon set in. The big question was why the Fed had marched the markets up to the top of the hill, only to march them back down again. Did the Fed know something the markets did not? Was the US economy less healthy than it seemed? What would happen next month?

The uncertainty could lead to some volatility in the final quarter of 2013. The markets thought they understood the Fed’s strategy, but now they feel the “forward guidance” has sent them in the wrong direction. To compound matters, Mr Bernanke is currently due to step down at the end of this year and October sees the US president in the midst of one of his regular battles with Congress over the US budget and the debt ceiling.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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