U.S. stocks cut their losses and moved higher on Wednesday as the market got past one of the big uncertainties heading into year-end. The Federal Reserve signaled a more aggressive unwinding of its monthly bond buying, as expected by the market, and forecast multiple rate hikes on the way next year.
The S&P 500 rose 0.5%, while the tech-heavy Nasdaq Composite was up 0.4%. The Dow Jones Industrial Average added 160 points. All three were in negative territory for the day before the central bank’s decision.
The Fed announced on Wednesday that it would wind down its asset purchases, a process known as tapering, at a faster pace amid a continued rise in inflation. The Fed will be buying $60 billion per month of bonds starting in January, down from December’s rate of $90 million, and said that it will likely continue that trajectory in the months ahead.
The move comes as the central bank is grappling with the highest inflation level in nearly four decades. The Fed was widely expect to accelerate its taper this month.
This sets the stage for a dramatic policy shift that will clear the way for a first interest rate hike next year. The central bank signaled on Wednesday that its members see three hikes in 2022.
“Now I have seen how high rates are going and how fast it’s going to happen. The uncertainty is removed from the market. From an equity perspective, now they just have to focus on earnings, margins and growth,” said Jim Caron, a chief strategist on the global fixed income team at Morgan Stanley Investment Management.
“It’s kind of a sigh of relief to the equities market who thought it might be much more aggressive. It’s kind of what we were thinking anyway,” he added.
Big banks, however, were lower even after the Fed signaled multiple rate hikes are on the way. The Fed’s actions boosted short-term rates more than long-term rates, thus causing that spread to actually narrow. Banks typically do better when the so-called yield curve is widening, with long rates moving faster, as that is how they make money: borrowing at short-term rates and lending out at long-term rates.
JPMorgan and Bank of America shares were lower. Some regional bank stocks, including Comerica, saw modest gains.
Fed Chairman Jerome Powell said at a new conference on Wednesday afternoon that the labor market is not fully recovered, pointed to a sluggish rebound in labor force participation, but said it was still appropriate to roll back some of the pandemic-era policies.
“We’re not going back to the same economy we had in February of 2020 … The post-pandemic labor market and economy in general, and the maximum level of employment that’s consistent with price stability evolves over time,” Powell said.
While the Fed meeting is in focus, investors are also monitoring the new Covid variant omicron. The World Health Organization on Tuesday warned the new Covid-19 omicron variant is spreading faster than any previous strain, and is likely in most countries of the world. The United Kingdom on Wednesday reported its highest number of daily cases since the pandemic began.
Retail sales for November came in worse than expected, rising 0.3% month-over-month. Economists surveyed by Dow Jones were looking for a 0.8% month.
On the political front, congressional Democrats passed a bill raising the debt ceiling, sending it to President Joe Biden early Wednesday just under the wire for when Treasury Secretary Janet Yellen said the government would run out of spending power.
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