Wall Street rallied despite US Federal Reserve warning tightening

As expected, the US Federal Reserve (Fed) keeps its key interest rate unchanged near zero. No date has been announced for a reduction in the central bank’s massive support purchases in the market, but measures to end the crisis may come soon.

The market reacted positively when the Federal Reserve released the news in its monetary policy report on Wednesday night in Norwegian time, but then pulled back. When trading ended in New York, the major indexes had crept a little per mile above the level they had been before the message from the Federal Reserve two hours ago.

• The broad S&P 500 index rose 0.95 percent.
• The Dow Jones Industrial Average rose 1 percent.
• The Nasdaq Technology Index rose 1.02 percent.

still welcome

If you take one step back, you will see that the Fed is still accommodating. It’s reasonable to want to go back to normal if the economy is as strong as the data indicates, chief strategist Mike Loweingart tells E*trade Financial to Bloomberg News.

Loewengart explains that the market is responding positively to the fact that the tightening may come faster than previously stated:

It is possible, given the recent volatility, that investors will see austerity measures and the prospect of higher interest rates in 2022, as a vote of confidence that the economic recovery will continue.

– It was critical

The Federal Reserve, as the US Federal Reserve is often called, bought bonds with both hands during the Corona crisis, a move to stabilize financial markets while interest rates were close to zero and exposed the rest of the economy to the epidemic. Now the Fed writes in its latest report that it is nearing the end.

“Since the support purchases began last year, the economy has been on the way to recovery, and we have seen progress both in terms of stability in the labor market, but also on the price level. If the development continues as expected, the Fed believes that the beginning of a downsizing may come soon. ‘, writes the Federal Reserve.

Support buying was crucial and helped stabilize the market. We’ve discussed how quickly downsizing needs to be done. Governor Jerome Powell said at a press conference that as long as the economy is on its way to recovery, we envision a gradual staff downsizing that will be completed in the middle of next year.

At the same time, it is reported that half of the central bank board members believe that the first rate hike could happen in 2022. At the previous meeting in June, the majority believed that this would not happen until 2023.

Major US indices rose immediately after the interest rate decision was presented, but fell again during Jerome Powell’s speech. That’s just as usual, according to Bespoke Investment Group.

Adjusts growth estimates

In the report released on Wednesday, the Fed also provided new forecasts for what it thinks about the US economy going forward.

The central bank now appears to be adjusting a number of its macroeconomic forecasts from the June meeting.

• Committee members envision gross national product growth of 5.9 percent this year, compared to a previous estimate of seven percent for growth. In 2022, growth is estimated at 3.8 percent, compared to 3.3 percent previously.
• Core growth for core inflation this year is estimated at 3.7 percent, up from 3 percent at the previous meeting in June. In 2022, the Fed projects inflation of 2.3 percent, compared to a previous estimate of 2.1 percent.
• Next year unemployment is estimated at 3.8 per cent. This year, the central bank expects an unemployment rate of 4.8 percent, up from the previous estimate of 4.5 percent.

The Fed’s message is wonderfully vague. The market has already priced in the downsizing and is now waiting for a specific date. Estimates of the interest rate level are somewhat more moderate than the market feared, says chief strategist Sima Shah at Principal Global Investors CNBC.

At a press conference, Governor Powell reiterated that the start of the cut in support purchases – and how quickly it will happen – is not intended to be a direct indication of when interest rate increases will begin.

According to the Federal Reserve, it will have other, tougher tests when the time comes for a key rate hike. Among other things, Governor Powell noted that “the appropriate time to raise interest rates” will depend on how the labor market, inflation and other economic growth develop in the coming months and years.

‘Just a matter of time’

While billions of dollars were pumped into the market, US stock markets rose to steady new highs. The repo measures were introduced at the start of the Corona crisis, and the Federal Reserve has spit more than $100 billion into the market every month through the pandemic.

But in line with the successful macroeconomic development since the initial Corona shock, many have wondered how long the shopping spree will last. In August, Powell said the downsizing could begin as early as this year.

– I guess it’s just a matter of time before they say something concrete, but only when it’s open, he said Chief Economist Elisabeth Holvik at Sparebank 1 Gruppen before the interest rate is announced.

Günsholt Hof pointed out, among other things Labor market report for August, where the result was much less new jobs than expected.

We are aware of the intention to start reducing by the end of the year. It’s about timing. Had very strong overall numbers come out in late summer, this week’s meeting would have been a good time. But Gunsholt Hof said the headline numbers were weaker than expected, and especially the August labor market report was disappointing.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.