Reserve Bank fovernor Philip Lowe has become the accidental hero of world equity markets

The US Fed will undoubtedly be watching the decisions made by all other major central banks but will not necessarily be guided by them. All economies have their own peculiarities and different tolerances to the risk of recession and inflation, so central banks won’t take a cookie-cutter approach. New Zealand’s central bank stuck to its script on Wednesday and lifted rates by 50 percentage points.

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Lowe justified the decision on rates as providing an opportunity to allow the previous steeper rate rises to do their work while noting there is not yet evidence of a wage break-out which would further fuel inflation.

There will be more rate rises to come but almost certainly these will be doled out in increments of 25 basis points – the first in November. The jury of economists is out on whether there will be another in December.

Meanwhile, Fed chairman Jerome Powell has previously interrupted previous positive market moods with hawkish comments about doubling down on getting US inflation under control.

And there have already been a number of false dawns this year for the equity bulls.

During the last two weeks in March, the US equities market rose 10 per cent only to slump again until June.

In July, there was another market reprieve lasting six weeks when markets picked up 12 per cent.

In the jargon of markets, these are referred to as bear market rallies. Over the past four days, the S&P 500 has risen more than 5 per cent – so by definition we are seeing another.

For this rally to be sustained, the US market will need further evidence that the Federal Reserve believes it will have done the heavy lifting on rates when (as expected) it lifts them another 75 percentage points in November.

The Fed is coming under increasing pressure from a variety of places to avoid sending the US economy into a proper recession.

It has already demonstrated its willingness to sacrifice bond and equity markets to the god of lower inflation, but enabling recession is a harder sell.

The United Nations piled on this week with its Trade and Development conference issuing a report saying, “The world is headed towards a global recession and prolonged stagnation unless fiscal and monetary policies holding sway in some advanced economies are quickly changed.”

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