We remain confident in our fundamental assessment – that the world’s financial authorities will win the war against the credit ‘crunch’. But we acknowledge that the authorities have had to fight more battles than we expected them to have to; that some of the battles have been a lot tougher than expected; and that new policy weapons have had to be developed.

Developments over the past month have given us greater conviction in our judgements. There has been a turnaround in markets and in market sentiment, and policymakers’ approaches to policy problems have smacked less of desperation. Equity markets’ recovery has occurred despite the continuing swathe of bad news on the US housing and labour markets, which has prompted many economists to trim US GDP growth forecasts further. 

Corporate news has not provided much respite. Many financial firms have announced further write-offs, and some have proposed further rights issues. But the surprise is that equity market participants have viewed the moves favourably. It is almost as if they have seen the recent developments as, if not the end game, then a sea-change in the credit crisis. It would seem that now many others are joining us in thinking that things might get better.

Policy traction may now improve, now that the Fed can slow down. The rapid rate at which it slashed rates during the first quarter of this year always ran the risk that the moves could create greater uncertainty. But now the Fed can dig in, entrenching expectations of its commitment to ensuring a recovery, and also enabling it to concentrate on other potential policy shifts.

So, for the first time since we started publishing Signpost last summer, we have decided to shift our policy forecasts in a more hawkish direction. We reckon that the Federal Reserve and European Central Bank will feel under slightly less pressure to cut rates further, with the US fiscal stimulus and improving economic data other factors to consider.