Review & Preview: Fed Dread

By Jeffrey Cane |  Wednesday, June 16 So Far, So Close. Two years from now is a relatively long time away in the market's scheme of things. Yet new indications from Federal Reserve policy makers that they may need to raise interest rates twice by late 2023 --  earlier than what they had signaled in March -- seemed near enough to rattle investors today.  “This is not what the market expected,” said James McCann of Aberdeen Standard Investments. “This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.” The Dow Jones Industrial Average quickly fell 320 points after the 2 p.m. release of the Fed’s latest monetary policy statement and updated summary of economic projections.  (More on the Fed's projections below.) Stocks recovered somewhat as Fed Chairman Jerome Powell seemed to play down the projections of rate increases at the news conference following their release. The Dow ended the day down 266 points, or 0.8%.  The S&P 500 fell 0.5%, and the Nasdaq Composite lost 0.2%. For the Dow and S&P, the declines were the steepest single-day declines since mid-May.  The Fed's signaling reverberated through the Treasury market, and yields climbed. The yield on the 10-year note rose to 1.57%, its sharpest one-day gain since March.  Yields on shorter-dated securities -- those most sensitive to a shift in interest rates -- also climbed, with the yield on the two-year at  0.2%, its highest in exactly a year.  Gold advanced 0.3%, to $1859.50 an ounce, while oil was up slightly, to $72.15 a barrel. The Cboe Volatility Index, or VIX, was up nearly 7% on the day, but remains subdued from its pandemic highs.  And the talking about tapering talk? Barron's Lisa Beilfuss has an update:  With the interpretation that liftoff [in interest rates] will come sooner than expected, so too might tapering begin earlier than investors have planned. The Fed’s statement Wednesday said it would continue buying $120 billion a month in Treasuries and mortgage-backed securities, but Powell opened the door to a tapering announcement during his press conference. “You can view this meeting as the talking-about-talking-about tapering meeting,” Powell said, requesting the oft-used phrase henceforth be retired.

 

DJIA: -0.77% to 34,033.67 S&P 500: -0.54% to 4,223.70 Nasdaq: -0.24% to 14,039.68 The Hot Stock: Enphase Energy +4.9% The Biggest Loser: Willis Towers Watson -7.22% Best Sector: Consumer Discretionary +0.05% Worst Sector: Utilities -1.5%