Stocks Rally after Fed Decides to Tighten Gradually
The major U.S. stock indexes closed higher across the board on Wednesday after the U.S. Federal Reserve’s interest rate decision and monetary policy statement.
In the cash market, the benchmark S&P 500 index settled at 2477.83. The blue chip Dow Jones Industrial Average closed at 21711.01, up 97.58 or +0.45% and the tech-based NASDAQ Composite finished the session at 6421.12, up 8.95 or +0.14%.
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The Dow was supported by Boeing, Its earnings topped expectations. Coca-Cola and Ford also posted better-than-expected quarterly results. The S&P 500 Index was underpinned by a surge in oil prices which helped boost energy stocks. The NASDAQ was up, but gains were limited as investors awaited the release of Facebook earnings after the close.
U.S. Federal Reserve
The Fed left its benchmark interest rate unchanged as previously expected. However, the central bank laid the groundwork for winding down its massive stimulus program in September. The move is essentially yield-curve management. The Fed is saying that the economy is too weak to handle a full rate hike, but the central bank can continue to tighten gradually by trimming its $4.5 trillion balance sheet.
The Federal Reserve said they plan to start unwinding “relatively soon,” which investors interpreted to mean September, since previously the central bank hinted it would start in December.
Finally, the central bank also acknowledged that inflation remains below its 2 percent target.
Treasury Yields
U.S. Treasury yields fell after the Fed announcements. This indicates investors felt the central bank was dovish. The benchmark 10-year yield traded at 2.3 percent while the two-year yield held around 1.363 percent.
Crude Oil
U.S. West Texas Intermediate and international-benchmark Brent crude oil rallied nearly 2% to an 8-week high on Wednesday, driven by a big drop in U.S. crude stockpiles.
Late Tuesday, industry group the American Petroleum Institute reported U.S. crude stockpiles fell by 10.2 million barrels the week-ending July 21. On Wednesday, the U.S. Energy Information Administration reported a 7.2 million barrel drop in inventories last week. Gasoline inventories also feel as well as distillates.
Gold
Gold futures whip-sawed after the Fed decision. The dovish tone sent the U.S. Dollar lower, creating demand for gold, but the market ran into a wall of selling at a technical chart point, pushing it lower for the day.
Rate increases are usually not good for gold, but the speed at which the Fed is tightening may give gold a little room to rally. However, increased demand for higher risk assets could put a lid on prices.