The Fed will ‘soon’ start slowing its monthly bond purchase pace if the economy continues to recover
US Equity Futures were trading higher a day after the Fed indicated a tapering could begin ‘soon’ as well as forecast an interest rate hike in 2022.
The US central bank indicated it could start raising its benchmark interest rate sometime next year, compared with three months ago. It also said it would “soon” start slowing the pace of its monthly bond purchases if the economy continues to recover. The Fed is buying bonds during the pandemic to help keep long-term interest rates low.
Markets were also confident after Evergrande, one of China’s largest private real estate developers, said it would pay off on Thursday. That allayed some concerns about the potential ripple effects of potentially heavily indebted Chinese real estate developers and possible defaults.
Fed to change trading rules for central bank officials, says Jerome Powell
On Wall Street, the S&P 500 rose 1%, breaking a four-day losing streak. The benchmark index initially climbed 1.4% after the Fed issued its statement at 2 p.m. Eastern.
Other major indices also rose, but lost some of their gains by late afternoon. The Dow Jones Industrial Average rose 1% to 34,258.32. The blue-chip index briefly climbed 520 points. The Nasdaq Composite rose 1% to 14,896.85.
Bond yields rose mostly. The yield on the 10-year Treasury note fell up and down after the Fed’s announcement, but held steady at 1.31%. Yield affects interest rates on mortgages and other consumer loans.
Analysts said the Fed’s policy update was in line with market expectations. The VIX, a measure of how much volatility investors expect for the S&P 500, sank nearly 14% following the Fed statement.
“It was so well telegraphed that it didn’t surprise anyone,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.
At a news conference, Federal Reserve Chairman Jerome Powell said the Fed plans to announce in early November that it will begin reducing its monthly bond purchases, should the job market continue to improve.
Gene Goldman, chief investment officer at Setera Financial Group, said the Fed’s shift showed inflation was starting to become a concern.
Evergrande collapse could be ‘worse’ for China than Lehman, according to person who predicted Enron’s collapse
“Our concern is that the Fed sticks to its view that this is a transitory phase, but we are not seeing evidence that it is transitory,” he said.
Goldman said the broader market could be in for a correction as economic growth slows and rising inflation persists. “Our concern about the overall economy and the market is that number one, we are overextending everything,” he said.
September has been a tough month for stocks. The S&P 500 is down 2.8%.
In addition to concerns over possible Fed policy changes, investors are nervous about rising cases of COVID-19 due to the highly contagious delta version and the impact of rising inflation on companies and consumers.
History doesn’t offer a great guide as to how markets will react to the Fed easing its support for the economy, mostly because it has been such a rare event.
Treasury yields jumped sharply in the summer of 2013 after the Fed chair signaled it might begin to slow its bond-buying program. Surprised investors assumed that rate hikes would follow even faster and raise the yield on the 10-year Treasury from less than 2.20% to 3% within three months.
But after the Fed announced in December that it would reduce its purchases, the 10-year yield made a U-turn, even as the Fed was reducing its support for a program to keep rates low.
Despite the volatility in the bond market, share prices remained relatively stable.
After falling from 1.70% in March, the 10-year yield this July has been relatively stable between 1.20% and 1.30%. Powell has repeatedly emphasized how slowly the Fed will move to raise interest rates by reducing its bond purchases.
More than 80% of stocks in the S&P 500 index rose on Wednesday, driven mostly by technology stocks, banks and companies that rely on direct consumer spending. Energy stocks posted solid gains as US crude oil prices rose 2.4%. Communications and utility stocks declined.
Get Granthshala Business on the go by clicking here
Smaller stocks outperformed the broader market. The Russell 2000 Index rose 1.5% to 2,218.56.
Netflix climbed 3.1% after the streaming entertainment service acquired the works of late British author Roald Dahl of famous children’s books like “Charlie and the Chocolate Factory.”
Facebook fell 4% after the social network told advertisers in a blog post that it was reducing web conversions by Apple mobile device users by about 15% following changes to Apple’s operating system.
FedEx fell 9.1%, the biggest drop among S&P 500 shares, after reporting increasingly higher costs despite increased shipping demand. Many industries are facing high costs due to a mix of labor and supply chain problems.
Meanwhile, Asian stocks were mostly up on Thursday.
Shares rose in Hong Kong, Shanghai, Australia and Taiwan but declined in South Korea and Malaysia. US futures were higher. Markets remained closed in Tokyo.
The Hang Seng Index in Hong Kong rose 2% to 24,745.96. The Shanghai Composite Index rose 0.6% to 3,651.27. Australia’s S&P/ASX 200 rose 1% to 7,368.40. South Korea’s Kospi fell 0.7% to 3,117.99.
In other trade, US benchmark crude oil fell 7 cents to $72.16 a barrel in electronic trading on the New York Mercantile Exchange on Thursday. On Wednesday, it rose $1.74 to $72.23 a barrel.
Internationally, Brent crude fell by 8 cents to $75.31 a barrel.
The US dollar rose from 109.76 yen to 109.86 Japanese yen. The euro fell from $1.1691 to $1.1688.
AP Business Writers Alex Veiga, Stan Cho and Damian J. Trois contributed.