Dollar jumps to 2-week high as Federal Reserve says it will start asset next month
U.S. stock benchmarks retreated Wednesday afternoon as the Federal Reserve announced that, for the first time in nine years, it would start reducing the size of its $4.5 trillion asset portfolio starting in October.
The U.S. central bank kept interest rates unchanged, as widely expected, but said it would start to shrink its balance sheet by $10 billion a month. The start of the asset unwind also places another rate increase before the end of the year by the Fed back on the table, signaling more definitively an end to the easy-money policies in the U.S. and an unprecedented unwind of crisis-era asset purchases that had helped to buoy markets over the past decade.
During a news conference to detail its policy plans, Yellen described the unwind would be conducted “gradually and predictably.”
“Even though this is a slow and deliberate and thoughtful unwind plan, it is not without its potential to rattle markets,” said Kristina Hooper, global market strategist at Invesco.
The Dow Jones Industrial Average DJIA, -0.01% was down 41 points, or 0.2%, at 22,337, after hitting a fresh intraday record at 22,399.33.
The S&P 500 index SPX, -0.15% was down 8 points, or 0.3%, at 2,597, after briefly touching its own fresh intraday day record at 2,508.85.
The Nasdaq Composite Index COMP, -0.39% meanwhile, was down a firmer 43 points, or 0.7%, at 6,420.
Meanwhile, 10-year Treasury note yield TMUBMUSD10Y, +1.34% jumped to 2.28%, compared with 2.23% earlier in the session, with expectations for higher rates and additional monetary tightening, via the portfolio decrease, encouraging selling in government bonds, pushing yields, which move in the opposite direction to prices, higher. The dollar, which draws bidders in a higher interest-rate regime, enjoyed a fillip, up 0.7% at 92.475, based on the ICE U.S. Dollar Index DXY, +0.93% which measures the buck against a half-dozen currencies.
Read: Why stock market investors shouldn’t sweat a shrinking Fed balance sheet
The Fed kept its targeted federal-funds rate between 1% to 1.25%, and said the devastation caused by Hurricanes Harvey and Irma isn’t likely to materially alter the course of the economy over the medium term.
The Fed’s interest rate projections, known as the so-called dot plot, suggests an interest-rate hike in December and three more in 2018.
A news conference hosted by Chairwoman Janet Yellen was set for 2:30 p.m. Eastern.
Some industry participants have been describing the asset reduction as the “great unwind” and worrying that it might roil markets. “It is the start of something unknown, it is going to start jitters. It is going to make us tremble,” said John Manley, chief equity strategist at Wells Fargo Funds Management.
However, the Fed is aiming to offer as little disruption as possible, he noted.
Several central-bank officials already wanted to start winding down the Fed’s portfolio of government securities in July, but the majority wanted to hold until a later date. Traders now expect the FOMC on Wednesday to reveal details on a balance-sheet reduction that could start as early as October.
