Stocks rally after Fed sticks to $ 120 billion monthly stimulus


Top line

Major stock indexes prolonged a morning rally on Wednesday after the Federal Reserve said it would delay the unwinding of its unprecedented economic stimulus, and although the central bank said a change could come soon, officials stopped before announcing a specific timetable, offering some breathing space to investors worried about an impending policy change.


In a statement released Wednesday afternoon, the Federal Open Market Committee said it would keep the federal funds rate unchanged between 0% and 0.25% and continue its policy of stimulus in the era of the pandemic, stressing that ‘An increase in Covid-19 cases has slowed economic conditions. recovery.

Heading the stimulus, the Fed has bought $ 80 billion in treasury bills and $ 40 billion in mortgage-backed securities each month since June 2020 to help boost investment and stimulate investment. demand in the economy.

Stocks rallied immediately after the announcement, with the Dow Jones Industrial Average adding to earlier gains and climbing 508 points, or 1.4%, to 34,428, while the tech-savvy S&P 500 and Nasdaq rallied. jumped about 1.3% and 1.2%, respectively.

In a statement, Fed Chairman Jerome Powell acknowledged that inflation had exceeded expectations and said broader economic progress, especially in the area of ​​jobs, could “soon” warrant change. policy, but he doubled asset purchases, saying they “help foster smooth market functioning and accommodating financial conditions.”

Powell said no decision has yet been made on a specific timeline, but noted officials could announce one as early as November and estimated that a “gradual” downsizing process will end by the middle of next year. “is likely to be appropriate”.

“The trajectory of the economy continues to depend on the evolution of the virus,” the Fed said on Wednesday, adding that advances in vaccinations would likely reduce the adverse effects on the economy, but saying risks remain.

Key context

The stock market began to recover from its pandemic-induced crash last year the day Powell pledged to use “the central bank’s full suite of tools to support the US economy” until that “further substantial progress” is made towards full economic recovery. Although pundits and lawmakers have increasingly warned that the heavy policy measures could lead to soaring inflation, markets have not reacted well to the prospect of a weaker stimulus, with stocks posting their worst week ever. two months after the Fed signaled in August that it could ease that support. year. “There is clearly an appetite within the Fed to reduce asset purchases, but it must keep investors on board while doing so, or risk a dreaded tantrum in the markets,” the analyst wrote. Oanda’s Craig Erlam in an email Wednesday, referring to the panicked investor that rocked markets in 2013 after the Fed signaled a policy change.

Large number

8,400 billion dollars. This is what the Fed has accumulated on its balance sheet after injecting more than $ 4 trillion in assets into the economy with its pandemic-era stimulus.

Chief critic

“While it’s not more hawkish than feared, it’s not necessarily a reason to drive out the market either,” Vital Knowledge Media founder Adam Crisafulli wrote in an email after. the announcement, reiterating that the reduction could begin as early as November.


Although Powell has long insisted that the lagging labor market warrants continued economic stimulus, other Fed officials have pointed to high inflation as the reason for restraining asset purchases. Among the most vocal about the cut, St. Louis Fed Chairman James Bullard has been urging the central bank for months to start cutting stimulus this fall. “I think there is concern that we are doing more damage than helping buy assets,” he told TBEN in August, citing the rise in prices, especially in the housing market. , as his main concern.

Further reading

S&P 500, Nasdaq Set New Records After Powell Reiterates Fed Commitment To $ 120 Billion Monthly Stimulus (TBEN)

Dow falls again after Evergrande Sparks’ worst day in months. What happens next? (TBEN)

Dow dips 600 points to two-month low as experts fear recession-like meltdown with Evergrande (TBEN)