Investors didn’t get their usual pre-Federal Open Market Committee meeting drift higher in stocks, but they did get a bit of a post-announcement bump. And with good reason: most of what the US Federal Reserve System, and Chair Janet Yellen, said reflects a central bank which wants to get rates off the floor but is not prepared to rapidly normalise policy.

A 2015 rate rise, or even perhaps two, are now to be expected, a process which won’t be easy for risky assets. Only the most optimistic can expect to get through that without equities at least hitting an air pocket.

More powerfully, the Fed looks likely to go more slowly in raising rates once it has begun, and be willing to stop or even reverse its course based on incoming data. Yellen urged observers not to focus overly on the first fed funds hike, but rather on the “entire trajectory” of rate increases.

That’s an indirect way of saying “We will raise rates but not too much.” “Economic conditions are anticipated to evolve in a manner that will only require gradual increases in the federal funds rate,” Yellen said.

The open market committee and Yellen also saw fit to reiterate a line from March’s statement which is more than simple boilerplate: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The fed funds rate will end the year at 0.625 per cent, according to updated projections released along with the decision not to change rates this time. This implies two rate increases this year. Futures markets showed falling expectations of hikes in September, October and December, though the weight of money is still predicting at least one before year end.

Longer-term forecasts for base rates were scaled back considerably: the median estimate for the end of 2016 is now 1.625 per cent, compared with the 1.875 per cent forecast in March. Estimates for growth were scaled back slightly, and for the unemployment rate were raised very slightly.

The overall picture is one of a central bank prepared to raise rates but going to great pains to prepare markets not to get overly exercised.

“To some extent, the emphasis on gradualism is probably also just an effort to minimise the shock for markets when normalisation begins,” economist Jim O’Sullivan at High Frequency Economics wrote in a note to clients.

Markets seem to have got the message. While the S & P500 was drifting lower in the run-up to the announcement, it rallied afterwards, closing slightly up for the day after rising more than a half a per cent from lows earlier in the day.

It used to be that an investor could count on some nice gains in the run-up to the FOMC announcement. The so-called pre-FOMC drift is a much studied phenomenon. A study by the New York Fed detailed how, since 1994, more than 80 per cent of the equity premium in US stocks has been earned in the 24 hours before FOMC announcements.

The party doesn’t end when the Fed speaks. The S & P500 has averaged a gain of 0.3 per cent on Fed days, according to Bespoke Investment data, 10 times the typical rise on all trading days.

While the Fed study was inconclusive, the clear implication is that investors have learnt that the central bank is more likely than not to say and do things which will drive equity prices higher.

That may well be because the levers that the Fed used to have to influence the economy are now less powerful, in part because of fundamental changes in the economy and in part, particularly now, because of limits to the power of monetary policy at lower interest rate levels.

That’s left the Fed in the unenviable position of depending on asset price inflation to stimulate growth, almost certainly limiting its willingness to hike.

So, as we head towards September and what may well be the first interest rate rise in nine years, two outcomes seem likely. First, when the Fed hikes, markets won’t like it.

They never do, and if they started to handle hikes with aplomb the Fed might be more willing to make them. Look for a fall of several percentage points.

Look also for the Fed to continue its mollifying message, and for investors to get the message.

The Fed-inspired drift higher in equities may be with us for a long time.

— Reuters