When the US Federal Reserve set out to print money and buy bonds, bond prices fell and share prices rose. When the Fed detailed its discussions about stopping bond purchases on Wednesday, bond prices fell and shares rose.

The S&P 500 finally passed its 2007 intraday high and economically sensitive cyclical stocks did better than the dull-but-safe defensive shares that have led the rally all year.

On the face of it this makes little sense. Perhaps the market is confused? After all, Japanese bonds have been all over the place in the days since the Bank of Japan announced plans to hoover them up.

Investors are split between believing that the sudden BoJ demand should push up prices, lowering yields, and believing that a stronger economy and inflation should push down prices, raising yields. Wild daily swings suggest the market is far from sure it is right, but overall yields have risen, with five-year yields doubling in a fortnight to 0.26 per cent.

In the US there is little confusion. The minutes of the Fed’s last rate-setting meeting suggest policymakers are ready to stop buying bonds by the end of the year, probably slowing purchases from their $85bn-a-month level first.

But there is a big caveat: the outlook for labour markets would have to “improve as anticipated”. Last week’s disappointing payroll numbers, and other weak economic data, came after the Fed comments were made but before they were published. The exit from bond purchases is less sure than it looks.

Even better for equity markets floating on a sea of Fed-supplied liquidity, the minutes noted that purchases of bonds could be increased if the economy worsens.

This looks like heads equities win, tails bonds lose. If the Fed’s actions work, the economy improves – usually good for shares and bad for bonds. If they fail to boost the economy, the Fed will step up purchases – which in the past have been good for shares and bad for bonds. The Bernanke put is still in force.

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