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The US Federal Reserve - an apology

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  • Over the past few years the UBS Morning Audio Comment may have given rise to the impression that we believed the US Federal Reserve to be a credible, enlightened central bank. In the wake of last night's policy decision, we would like to apologise for having given that impression.
  • The Fed has erred, possibly seriously. Yesterday destroyed any pretence of transparency, and all but guaranteed that when policy does change there will be a negative market reaction. In the wake of the shock yesterday investors are unlikely to have certainty about future policy decisions.
  • Risk markets' reactions imply that investors are pricing in a Fed error. If investors believed the Fed's justification for delaying a tightening, then the Fed's perceived economic risks would argue against "risk on". Only continued liquidity without any justifying risk could justify "risk on".
  • The aftermath should dominate market action today there are UK retail sales and the US Philly Fed survey, but this will not distract. Economists are not angry with the Fed; just terribly, terribly disappointed. We must hope Mr Bernanke goes to his room and thinks about the consequences of what he has just done.

Listen to the audio version of this briefing.