Stocks on Wall Street closed broadly higher on Wednesday after the Federal Reserve signaled it may start easing its extraordinary support measures for the economy later this year.
The central bank has indicated that it may start raising its benchmark interest rate next year, earlier than it expected three months ago. He also said he would likely start slowing the pace of his monthly bond purchases âsoonâ if the economy continues to improve. The Fed bought bonds throughout the pandemic to help keep long-term interest rates low.
The S&P 500 rose 1%, breaking a four-day losing streak. The benchmark initially climbed 1.4% after the Fed released its statement at 2 p.m. EST.
The other major indexes also rose, but lost some of their gains late in the afternoon. The Dow Jones Industrial Average rose 338.48 points, or 1%, to 34,258.32. The blue chip index briefly rose 520 points. The Nasdaq composite gained 150.45 points, or 1%, to 14,896.85.
Bond yields mostly increased. The yield on the 10-year Treasury bill fluctuated after the Fed’s announcement, but was little changed at 1.31% from 1.32% on Tuesday night. The yield influences the interest rates on mortgages and other consumer loans.
Wall Street analysts said the Fed’s policy update was in line with market expectations. The VIX, which measures the volatility investors expect for the S&P 500, fell about 14% after the Fed’s statement.
âIt was telegraphed so well that it didn’t take anyone by surprise,â said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.
In a press conference, Federal Reserve Chairman Jerome Powell said the Fed plans to announce as early as November that it will start cutting its monthly bond purchases, if the labor market continues to improve. constant.
The Fed’s shift has revealed that inflation is starting to be a concern, said Gene Goldman, chief investment officer at Cetera Financial Group.
“Our concern is that the Fed continues to stick to its view that this is a transitional phase, but we see no evidence that this is transitional,” he said.
Goldman added that the broader market could see a correction as economic growth slows and inflation persists. “Our concerns about the economy and the market in general are number one, we are at the peak of everything,” he said.
Even with Wednesday’s rally, September was a tough month for stocks. The S&P 500 is down 2.8%. The declines threaten to end a streak of monthly gains that began in February.
Wall Street has tried to gauge how the slowing economic recovery will affect the Fed’s decision-making process. The market as a whole has been agitated as this issue persists amid growing cases of COVID-19 due to the highly contagious delta variant and the impact of rising inflation on businesses and consumers.
History does not offer a great guide to how the markets will react to the Fed’s easing of support for the economy, mainly because it has been such a rare event. But market movements around them can seem counterintuitive.
Consider the summer of 2013, when Treasury yields rose sharply after the then Fed chairman hinted that it might start slowing down its bond buying program. Investors were taken by surprise and the supposed rate hikes would follow quickly as well. That pushed the 10-year Treasury yield up to 3%, from less than 2.20% in three months.
But after the Fed’s official announcement that it would cut back on buying finally came in December, the 10-year rate quickly turned around and started falling again. That’s even if the Fed cut back its support for a program designed to keep rates low. Analysts say this shows the power of the Fed through signaling: A decrease may mean less aid is on its way to the economy, which may mean slowing growth and inflation.
Despite all the turmoil in the bond market in 2013, stock prices have remained relatively stable.
What makes this situation different from 2013 is that the bond market did not experience tapping tantrum. The 10-year rate has remained relatively stable between 1.20% and 1.30% since July, after declining 1.70% in March. Powell has repeatedly emphasized how the Fed will gradually shift from cutting its bond purchases to raising interest rates.
More than 80% of stocks in the S&P 500 index rose on Wednesday. Tech stocks, banks and companies that rely on direct consumer spending accounted for a large chunk of the gains. Energy stocks posted strong gains as the price of US crude oil rose 2.4%. The values ââof communication and public services have fallen.
Small stocks outperformed the market at large. The Russell 2000 Index rose 32.38 points, or 1.5%, to 2,218.56.
Netflix climbed 3.1% after the streaming entertainment service acquired the works of Roald Dahl, the late British author of famous children’s books such as “Charlie and the Chocolate Factory”.
Facebook fell 4% and tempered gains in communications stocks after the social network told advertisers in a blog post that it underestimated web conversions by users of Apple mobile devices by about 15% as a result of changes to Apple’s operating system.
FedEx fell 9.1%, the biggest drop among S&P 500 stocks, after reporting significantly higher costs even as shipping demand increased. A wide range of industrial and other businesses have faced higher costs due to a mix of labor and supply chain issues.
Meanwhile, Wall Street may have reason to be less worried about heavily indebted Chinese real estate developers and the damage they could cause if they default and spill over into the markets. Evergrande, one of China’s largest private sector conglomerates, said it would make a payment due on Thursday, which may allay some of those concerns.
âI don’t want to say it’s over, but it looks like it’s being handled in a way that shouldn’t raise the fear of contagion too much,â said Jacobsen of Wells Fargo.
European markets closed mostly higher and Asian markets were mixed. The markets in South Korea and Hong Kong were closed for holidays.