Financial markets think Janet Yellen might be bluffing.
The US Federal Reserve reiterated in its latest monetary policy statement that the Fed wants to persist with "gradual" interest rate rises, in concert with starting "relatively soon" to unwind its bloated $US4.5 trillion balance sheet.
Yet bond, currency and equity investors do not appear to be heeding the mooted tightening of policy, especially short-term interest rates, defiantly believing that remarkably subdued inflation will force the Fed to retreat to its dovish habits.
Investors latched on to the Fed noting inflation was running "below" the 2 per cent target, compared to "somewhat below" in its June statement.
The greenback plunged and the Australian dollar rallied to briefly touch US80¢ on Thursday morning (Australian time) soon after the Fed's statement was published and the overnight target rate range was left unchanged at 1 to 1.25 per cent.
Bond yields declined and shares on Wall Street immediately edged higher to near record highs, boosted earlier by a 10 per cent lift in Boeing shares on soaring second-quarter profits.
The Fed confirmed it plans to implement a balance sheet normalisation program relatively soon (probably in September according to market economists), compared to "this year" noted in June.
Yet paradoxically, the 10-year US Treasury yield fell to 2.28 per cent, from 2.31 per cent.
Admittedly, the balance sheet run down is likely to move at glacial pace, starting at just $US10 billion of securities a month.
JPMorgan chief global strategist, David Kelly, a persistent hawkish Fed watcher, says the market is "too complacent" about the monetary policy outlook.
Yet he is in the minority.
Fed fund futures are pricing in a less than 50 per cent chance of a rate increase by December.
Markets are eerily calm and the volatility index, which gauges fear in the market, has dropped to the lowest reading since 1993.
The Goldman Sachs US Financial Conditions Index, a weighted sum of a short-term bond yield, a long-term corporate yield, the exchange rate, and a stock market variable, has eased to its most accommodating level since late 2014.
Looser financial market conditions come despite three hikes in the Fed funds rate since December and the Fed telegraphing a further gradual tightening of the short and long end of the bond yield curve.
To be sure, an easing of the Goldman index from a cyclical peak in January 2017, is partly due to traders unwinding premature bets on a Donald Trump fiscal stimulus, which now looks less certain and will be more modest if it materialises.
Bullish sentiment about a "Goldilocks" low-inflation, weaker greenback, rising-corporate-profit environment is also a decisive factor.
Second-quarter US corporate profits are expected to have jumped 9.9 per cent, based on the results so far of about one-third of S&P; 500 companies.
Chair Yellen warned last month that asset valuations were "somewhat rich" based on traditional measures such as price-to-earnings ratios. The US S&P; 500 has gained a further 2.5 per cent since her remarks on June 27.
Inflation and employment remain the Fed's main objectives. The jobless rate is very low at 4.4 per cent, despite little sign of wage pressure.
Yet investors in most asset classes appear to be in an ebullient mood to party, doubting that Yellen will take away the punchbowl.
For markets, seeing will be believing when it comes to a further Fed tightening of short-term rates.
