Commuters leave a subway station on Wall Street near the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images
Forward contracts linked to major U.S. stock indices ticked higher at the start of the overnight session Wednesday night after the Federal Reserve said hours earlier that it did not currently expect to raise interest rates until 2023.
Fed Chairman Jerome Powell reiterated that the central bank wants to see inflation consistently above its 2% target and significant improvement in the US labor market before considering rate changes or monthly bond purchases.
Dow futures rose 45 points, indicating gains of a similar magnitude when regular trading resumed on Thursday. S&P 500 and Nasdaq 100 futures traded just north of their flat lines.
The key message of Wednesday’s Fed meeting ‘is that the committee expects to be extremely accommodating for a very long time to come, even if the economic outlook becomes clearer’, writes Eric Winograd, senior economist at AB.
“The FOMC shares the market’s view that growth and inflation are likely to recover if activity increases in 2021, but does not consider the increase in activity to be sustainable,” he added.
The movements after the hour come after a late stock market during Powell’s remarks.
The upswing pushed the Dow Jones Industrial Average to its first close above 33,000 with a gain of 189 points. The S&P 500 also broke a record, rising 0.3% to 3,974 after falling 0.7% earlier in Wednesday’s session.
The Nasdaq Composite, which fell to 1.5%, wiped out its early losses and ended the day 0.4% higher at 13,525.20. The technological benchmark was under pressure on Wednesday morning as rising bond yields boosted equities.
Announcements by the Fed and its leader dictated trading on Wednesday after the Fed improved its economic outlook to reflect expectations for a stronger recovery, while at the same time weakening investor concerns that it could abandon its easy monetary policy sooner. .
The Fed said it expects gross domestic product to grow by 6.5% in 2021 before cooling later and rising inflation by 2.2% this year, measured by personal consumption expenditure. The central bank’s goal is to keep inflation at 2% in the long run.
But Powell succeeds in convincing traders that the Fed will have to see a substantial and sustained rise in prices and a sharp drop in unemployment before it can debate changes to its current easy policy stance.
The Fed expects to continue an easy monetary policy ‘for a few quarters to come, to keep the policy rate at zero for the foreseeable future and to keep the interest rate neutral for several years,’ said Winograd of AB added. “This is an extraordinarily long period of extraordinarily accommodative policies.”
The ten-year treasury yield reached its highest day after the central bank update. The rate was last seen at 1.646%. Earlier in the session, the norm rate rose to 1.689%, reaching an unseen level since the end of January 2020.
Higher rates have hurt growth-oriented companies especially because they undermine the value of future cash flows.
Tesla, for example, fell 3.8% on Wednesday ahead of the Fed’s announcement, following the rise in long-term rates. The stock rose after the release of the Fed and the session rose by 3.6% as yields fell.